[Federal Register Volume 68, Number 51 (Monday, March 17, 2003)]
[Proposed Rules]
[Pages 12622-12639]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-6180]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 4

RIN 3038-AB97


Additional Registration and Other Regulatory Relief for Commodity 
Pool Operators and Commodity Trading Advisors

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rules.

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SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC) 
is proposing to amend Rule 4.5, which provides an exclusion from the 
definition of the term ``commodity pool operator'' (CPO) for certain 
persons, and Rules 4.13 and 4.14, which provide exemption from CPO and 
commodity trading advisor (CTA) registration, respectively, for certain 
other persons, so as to expand the availability of the relief provided 
by these rules. The Commission also is proposing rule amendments to 
facilitate communications by CPOs and CTAs, including proposals that 
would: (1) Permit certain communications prior to Disclosure Document 
distribution; (2) relieve CPOs from duplicative disclosure and 
reporting requirements in the ``master/feeder fund'' context; (3) 
establish criteria for CPOs to distribute periodic Account Statements 
electronically; and (4) harmonize the various signature requirements of 
Part 4. Further, the Commission is affirming, with certain 
modifications, the no-action relief it previously has issued with 
respect to the trading criteria of Rule 4.5 for certain persons and the 
need to register as a CPO or CTA for certain other persons.

DATES: Comments must be received by May 1, 2003.

ADDRESSES: Comments on the proposed rules should be sent to Jean A. 
Webb, Secretary, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street, NW., Washington, DC 20581. Comments may be 
sent by facsimile transmission to (202) 418-5528, or by email to 
[email protected]. Reference should be made to ``Proposed Rules for 
CPO and CTA Registration and Other Regulatory Relief.''

FOR FURTHER INFORMATION CONTACT: Barbara S. Gold, Associate Director, 
or Christopher W. Cummings, Special Counsel, Division of Clearing and 
Intermediary Oversight, Commodity Futures Trading Commission, 1155 21st 
Street, NW., Washington, DC 20581, telephone number: (202) 418-5450 or 
(202) 418-5445, respectively; facsimile number: (202) 418-5536, or 
(202) 418-5547, respectively; and electronic mail: [email protected] or 
[email protected], respectively.

SUPPLEMENTARY INFORMATION: 

Table of Contents

I. Background
    A. Statutory and Regulatory Authorities
    B. The Prior Rule 4.5 Proposal
    C. The Advance Notice of Proposed Rulemaking (ANPR)
    D. Roundtable on CPO and CTA Issues
II. Comments on the Prior Rulemaking Activities
    A. Comments on the Prior Rule 4.5 Proposal
    B. Comments on the ANPR
III. The Proposals
    A. Proposed Amendment to Rule 4.5: Deleting Trading Criteria for 
Exclusion from the CPO Definition
    B. Proposed Amendments to Rule 4.13: Expanding and Adding CPO 
Registration Exemptions
    1. Proposed Amendments to Rule 4.13(a)(2): Expanding the current 
exemption
    2. Proposed Rule 4.13(a)(3): Adding a limited trading exemption
    3. Proposed Rule 4.13(a)(4): Adding an exemption where pool 
participants meet specified sophistication criteria
    4. Additional provisions under Rule 4.13
    5. Alternative proposal for relief
    C. Proposed Amendments to Rule 4.14: Expanding and Adding CTA 
Registration Exemptions
    1. Proposed Amendments to Rule 4.14(a)(8)
    a. Exemption for state-registered investment advisers (IAs)
    b. Exemption where advice is provided to foreign funds
    c. Exemption where advice is to Rule 4.13(a)(3) and 4.13(a)(4) 
pools
    2. Proposed Rule 4.14(a)(10): Counting Legal Organizations as a 
Single ``Person''
    D. Proposed Amendments to Rules 4.21, 4.22 and 4.31
    1. Permitting communications prior to Disclosure Document 
distribution
    2. Removing duplicative requirements in the ``master/feeder 
fund'' context
    3. Distributing Account Statements electronically
    4. Providing facsimile signatures on Account Statements and 
Annual Reports
    5. Conforming signature requirements

[[Page 12623]]

IV. Temporary No-Action Relief
    A. Temporary No-Action Relief for Rule 4.5 Eligible Persons
    B. CPO and CTA Temporary Registration No-Action Relief
    1. Relief for CPOs
    a. In General
    b. CPOs who operate ``Funds-of-Funds''
    2. Relief for CTAs
    3. Claim of Registration No-Action Relief
    4. One-Way Disclosure by CPOs and CTAs
    5. Effect of Filing a Claim of No-Action Relief
    a. For CPOs
    b. For CTAs
    C. Other Matters
    1. Effect of Final Rulemaking on No-Action Relief
    2. Continued Availability of No-Action Relief from Commission 
Staff
V. Other Matters
    A. Regulatory Flexibility Act
    B. Paperwork Reduction Act
    C. Cost-Benefit Analysis

I. Background

A. Statutory and Regulatory Authorities

    Section 1a(5) of the Commodity Exchange Act (Act) defines the term 
``commodity pool operator'' to mean:

[A]ny person engaged in a business that is of the nature of an 
investment trust, syndicate, or similar form of enterprise, and who, 
in connection therewith, solicits, accepts, or receives from others, 
funds, securities, or property, either directly or through capital 
contributions, the sale of stock or other forms of securities, or 
otherwise, for the purpose of trading in any commodity for future 
delivery on or subject to the rules of any contract market or 
derivatives transaction execution facility, * * *.\1\

    \1\ 7 U.S.C. 1a(g) (2000). Section 1a(5) also provides the 
Commission with authority to exclude persons from the CPO 
definition.
    Commission Rule 4.10(d)(1) correspondingly defines the term 
``pool'' to mean ``any investment trust, syndicate or similar form 
of enterprise operated for the purpose of trading commodity 
interests.'' Unless otherwise noted, Commission rules cited to 
herein are found at 17 CFR Ch. I (2000). Both the Act and the 
Commission's rules issued thereunder can be accessed through the 
Commission's Web site: http://www.cftc.gov/cftc/cftclawreg.htm.
    CFTC Staff Letters from 1995 on can be accessed through the 
Commission's Web site http://www.cftc.gov/opaletters.htm.

    Section 4m(1) of the Act \2\ provides, in relevant part, that it is 
unlawful for any CPO, ``unless registered under [the] Act, to make use 
of the mails or any means or instrumentality of interstate commerce'' 
in connection with its business as a CPO. Thus, except for the narrow 
exceptions currently provided in Rules 4.5 and 4.13, the operator of a 
collective investment vehicle that trades commodity interest contracts, 
whether for bona fide hedging purposes \3\ or otherwise, must be 
registered with the CFTC as a CPO.\4\
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    \2\ 7 U.S.C. 6m(1) (2000).
    \3\ The Commission's definition of bona fide hedging is set 
forth in Rule 1.3(z).
    \4\ Rule 4.5 provides an exclusion from the CPO definition for 
certain otherwise regulated ``eligible persons'' with respect to 
their operation of certain ``qualifying entities,'' as those terms 
are defined in the rule, so long as they restrict the extent of 
their non-hedging activity in commodity interests as prescribed by 
the rule. As is discussed below, the Commission proposed to amend 
Rule 4.5, and by this Federal Register release is proposing further 
amendment of Rule 4.5.
    Rule 4.13 provides an exemption from CPO registration for the 
operators of essentially ``family, club or small pools,'' as those 
pools are described in the rule. See 44 FR 1918, 1919 (Jan. 8, 
1979). As is discussed below, the Commission also is proposing to 
amend Rule 4.13.
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    Section 1a(6)(A) of the Act defines the term ``commodity trading 
advisor'' to mean any person who:

    (i) For compensation or profit, engages in the business of 
advising others, either directly or through publications, writings 
or electronic media, as to the value or the advisability of trading 
in--
    (I) Any contract of sale of a commodity for future delivery made 
or to be made on or subject to the rules of a contract market or 
derivatives transaction execution facility;
    (II) Any commodity option authorized under section 4c; or
    (III) Any leverage transaction authorized under section 19; or
    (ii) For compensation or profit, and as part of a regular 
business, issues or promulgates analyses or reports concerning any 
of the activities referred to in clause (i).\5\
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    \5\ 7 U.S.C. 1a(6)(A) (2000).

    Section 1a(6) also excludes certain persons not at issue here from 
the CTA definition, and provides the Commission with authority to 
exclude additional persons from that definition.
Section 4m(1) of the Act also requires CTAs to register as such with 
the Commission and, along with Section 4m(3) and Rule 4.14, provides 
exemption from CTA registration.\6\
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    \6\ As is discussed below, the Commission similarly is also 
proposing to amend Rule 4.14.
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    If a person is exempt from registration as a CPO or CTA, its 
associated persons (APs) are not required to register as such. Further, 
neither the exempt CPO or CTA, nor any of its APs, is required to 
become a member of a registered futures association.
    Generally, CPOs and CTAs who are, or who are required to be, 
registered with the Commission, must provide prospective pool 
participants or advisory clients, as the case may be, with a Disclosure 
Document containing specified information \7\--e.g., the business 
background of the CPO or CTA and its principals, past performance, fees 
and other expenses, and conflicts of interest--and they must make and 
keep specified books and records.\8\ These CPOs also must provide 
unaudited periodic financial reports and certified annual reports to 
participants in their pools.\9\ Additionally, regardless of 
registration status, all persons who come within the CPO or CTA 
definition are subject to certain operational \10\ and advertising 
requirements \11\ under Part 4, to all other provisions of the Act and 
the Commission's rules prohibiting fraud that apply to CPOs and CTAs, 
and to all other relevant provisions of the Act and the Commission's 
rules that apply to all commodity interest market participants, such as 
the prohibitions on manipulation and the trade reporting requirements.
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    \7\ Rule 4.21 for CPOs and Rule 4.31 for CTAs.
    \8\ Rule 4.23 for CPOs and Rule 4.33 for CTAs.
    \9\ Rule 4.22
    \10\ Rule 4.20 for CPOs and Rule 4.30 for CTAs.
    \11\ Rule 4.41.
    While Rules 4.7 and 4.12(b) provide relief for certain 
registered CPOs from the Disclosure Document, periodic and annual 
reporting, and recordkeeping requirements of Rules 4.21, 4.22, and 
4.23, they do not affect the applicability of Rules 4.20 and 4.41 to 
these CPOs. Similarly, CTAs who have claimed relief under Rule 4.7 
continue to remain subject to Rules 4.30a nd 4.41.
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B. The Prior Rule 4.5 Proposal

    Rule 4.5 makes available to certain persons (eligible persons) an 
exclusion from the definition of CPO with respect to their operation of 
certain entities (qualifying entities) that would otherwise be treated 
as commodity pools under the Act, but that are already subject to 
extensive operating requirements of another federal or state 
regulator.\12\ These eligible persons and their qualifying entities 
include: (1) Investment companies registered as such under the 
Investment Company Act of 1940 (ICA); (2) state-regulated insurance 
companies with respect to their operation of insurance company separate 
accounts; (3) state-or federally-regulated financial depository 
institutions with respect to their operation of separate units of 
investment; and (4) trustees, named fiduciaries and certain designated 
fiduciaries of or employers maintaining pension plans subject to Title 
I of the Employee Retirement Income Security Act of 1974 with respect 
to the operation of such plans.\13\ In order to claim exclusion from 
the CPO definition under Rule 4.5, an eligible person must file a 
Notice of Eligibility with the National Futures Association (NFA) \14\ 
and the Commission.\15\ The Notice must

[[Page 12624]]

contain specified representations about how the person will operate the 
qualifying entity, including, as is discussed below, a requirement to 
restrict the amount of the entity's commodity interest trading with 
respect to its non-hedging activity.
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    \12\ See, generally, 50 FR 15868 (Apr. 23, 1985) for background 
information on Rule 4.5.
    \13\ Rules 4.5(a) and (b).
    \14\ NFA is a futures association registered as such with the 
Commission under section 17 of the Act, 7 U.S.C. 21 (2000).
    \15\ Rule 4.5(c).
    Additionally, Rule 4.5 provides that certain pension plans are 
not commodity pools. Because this exclusion is self-executing, no 
notice must be filed to claim it. Accordingly, the amendment to Rule 
4.5(c) that the Commission is today proposing does not apply to 
these plans or their operation. See Rule 4.5(a)(4)(i)-(iv).
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    Based upon its staff's experience in administering Rule 4.5, the 
Commission has made various revisions to the rule subsequent to the 
rule's initial adoption. These revisions have expanded the range of 
persons eligible to claim relief under the rule \16\ and the trading 
strategies that may be undertaken in accordance with the rule.\17\ 
Based upon staff's most recent experience with Rule 4.5, the Commission 
published for public comment a proposed revision to the non-hedge 
operating criteria and, in connection therewith, the Commission issued 
temporary no-action relief (Prior Rule 4.5 Proposal).\18\ Based upon 
further consideration, and in connection with the CPO registration 
exemptions it is proposing below, by this Federal Register release the 
Commission is withdrawing the Prior Rule 4.5 Proposal and, in lieu 
thereof, is proposing another amendment to Rule 4.5. Pending the 
conclusion of the instant rulemaking, the no-action position the 
Commission issued in connection with the Prior Rule 4.5 Proposal will, 
subject to clarification as discussed below in Section IV of this 
release, remain in effect.
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    \16\ See 58 FR 43791 (Aug. 18, 1993). The Commission also has 
expanded the class of persons who are ``non-pools'' under Rule 4.5. 
See 65 FR 24127 (Apr. 25, 2000).
    \17\ See 58 FR (Jan. 28, 1993). The original limitation of the 
rule encompassed all commodity interest trading. Currently, 
unlimited hedging may be engaged in under the rule, while non-
hedging activity remains limited.
    \18\ 67 FR 65743 (Oct. 28, 2002). Both the Prior Rule 4.5 
Proposal and the comment letters the Commission received thereon may 
be accused through http://www.cftc.gov/foia/fedreg02/foia.fedreg02.htm#SECTIONA.
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C. The Advance Notice of Proposed Rulemaking (ANPR)

    To address certain market developments and changed circumstances 
applicable to persons who do not qualify for an exclusion from the CPO 
definition under Rule 4.5 or an exemption from CPO or CTA registration 
under the existing statutory and regulatory framework, the Commission 
issued the ANPR.\19\ As the Commission stated:
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    \19\ 67 FR 68785 (Nov. 13, 2002). Both the ANPR and the comment 
letters the Commission received thereon may be accessed through: 
http://www.cftc.gov/foia/fedreg02/foiafedreg02.htm#SECTIONA.

    When the Commission adopted Rule 4.13, there were fewer than a 
dozen designated commodity interest contracts based on stock 
indices, interest rates or other financial instruments. Since 1979, 
however, the Commission has designated, and trading has commenced 
in, more than 180 commodity interest contracts based on various 
financial instruments. These contracts frequently have attracted the 
interest of operators of collective investment vehicles, some of 
whom have registered with the Commission as CPOs so that they can 
use commodity interest contracts in their investment and risk 
management strategies. Others, however, have avoided participation 
in the commodity interest markets. While Rules 4.5 and 4.13 do 
provide CPO registration relief, their criteria are too restrictive 
for many operators of collective investment vehicles to meet.
    Over time, persons who traditionally gave advice to collective 
investment vehicles solely on securities trading have become 
interested in providing trading advice to collective investment 
vehicles on commodity interest contracts based on various financial 
instruments as well. Absent the availability of an exemption, these 
persons have had to either register with the Commission as CTAs or 
refrain from providing any such commodity interest advice. 67 FR 
68785, 68786.

    By the ANPR, the Commission published for public comment two 
proposals it had received that would provide additional exemptions from 
CPO registration (one of these also would provide an additional 
exemption from CTA registration). These proposals were submitted by NFA 
and the Managed Funds Association (MFA).\20\ NFA proposed: (1) An 
exemption from CPO registration where the operator restricts its pool's 
non-hedge commodity interest positions to a limited amount of pool 
assets (i.e., it may commit no more than 5 percent of the pool's 
liquidation value to establish such positions), and restricts its 
pool's participants to ``accredited investors'' as defined in Rule 
501(a) \21\ under the Securities Act of 1933 (Securities Act); \22\ and 
(2) an exemption from CTA registration for those persons that advise 
pools operated by CPOs that have claimed either an exemption from 
registration under the proposed NFA rule or an exclusion from the CPO 
definition under Rule 4.5 (NFA Proposal). MFA proposed an exemption 
from CPO registration for pool operators that restrict participation in 
their pools to certain ``qualified eligible persons'' (QEPs) as defined 
in Rule 4.7 and certain ``accredited investors'' (MFA Proposal). By the 
ANPR the Commission also issued temporary registration no-action relief 
for certain CPOs and CTAs.\23\
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    \20\ MFA is a non-profit membership organization for investment 
professionals in the hedge fund, futures and alternative investments 
industries.
    \21\ 17 CFR 230.501(a)(2002).
    \22\ 15 U.S.C. 77a et seq. (2002).
    \23\ See 67 FR 68786, 68788-89.
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    Based upon the comments received on the ANPR,\24\ and as a result 
of its own further consideration, the Commission is proposing herein 
CPO and CTA registration exemptions based on the NFA and MFA Proposals. 
Pending the conclusion of this rulemaking, the CPO and CTA registration 
no-action relief that the Commission issued in connection with its 
publication of the ANPR will, subject to modification and clarification 
as discussed below, remain in effect.
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    \24\ Section II of the Federal Register release discusses the 
comments the Commission received on the ANPR, as well as the 
comments the Commission received on the Prior Rule 4.5 Proposal.
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D. Roundtable on CPO and CTA Issues (Roundtable)

    Section 125 of the Commodity Futures Modernization Act of 2000 
(CFMA) \25\ required the Commission to ``conduct a study of the [Act] 
and the Commission's rules, regulations and orders governing the 
conduct of persons required to be registered under the Act.'' Pursuant 
to this directive, the Commission conducted such a study, and in June 
2002, issued its findings in a ``Report on the Study of the Commodity 
Exchange Act and the Commission's Rules and Orders Governing the 
Conduct of Registrants under the Act (Report).'' \26\ In September 
2002, the Commission held a ``Roundtable on CPO and CTA Issues'' to 
address, among others, issues identified in the Report relating to 
overlapping regulatory jurisdiction faced by members of the managed 
funds industry.\27\ As a result of the testimony provided at the 
Roundtable, and also based on prior staff activity in this area, by 
this Federal Register release the Commission is proposing additional 
regulatory relief for CPOs and CTAs. This relief would: (1) Permit 
certain communications by CPOs and CTAs with prospective and existing 
pool participants and advisory clients prior to Disclosure Document 
distribution; (2) relieve CPOs from duplicative disclosure and 
reporting requirements in the ``master/feeder fund'' context; (3) 
establish criteria for CPOs to distribute

[[Page 12625]]

periodic Account Statements electronically; and (4) harmonize the 
various signature requirements of Part 4. Each of the proposals is 
discussed below.
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    \25\ Pub. L. No. 106-554, Appendix E, Sec.  125, 114 Stat. 
2763A-365 (2000).
    \26\ The Report may be accessed through http://www.cftc.gov/files/opa/opaintermediarystudy.pdf.
    \27\ Comments received in connection with the Roundtable may be 
accessed through http://www.cftc.gov/opa/press02/opa4700-02.htm.
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II. Comments on the Prior Rulemaking Activities

A. Comments on the Prior Rule 4.5 Proposal

    The Commission received five comment letters in response to the 
Prior Rule 4.5 Proposal.\28\ All of the commenters supported the 
proposed amendment, with various commenters stating that it would 
provide increased trading flexibility under Rule 4.5 in general and 
accommodate security futures products in particular. Commenters did, 
however, request certain clarifications of the terms and application of 
the non-hedge tests employed in the Prior Rule 4.5 Proposal--e.g., 
suggesting that ``aggregate notional value'' be determined on a net 
basis and that, at all times, qualifying entities should be able to 
satisfy one test or the other. As is discussed below in this Federal 
Register release, the Commission has taken these requests for 
clarification into account in both the rules it is proposing and the 
no-action positions it is maintaining.
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    \28\ Letters were submitted by: a registered futures 
association; an investment company trade association; a bar 
association; a contract market; and an investment adviser.
    One commenter suggestsed that the Commission adopt specified 
additional categories of eligible persons and non-pools under Rule 
4.5. This suggestion is, however, outside the scope of this proposed 
rulemaking. The Commission nonetheless intends to consider it in the 
future.
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B. Comments on the ANPR

    The Commission received twenty-three comment letters in response to 
the ANPR.\29\ All of these commenters similarly encouraged Commission 
efforts to expand registration exemptions for CPOs and CTAs. While 
commenters generally supported both the NFA and MFA Proposals, several 
specifically urged adoption of the MFA Proposal, stating that it would 
bring more participants into the commodity interest markets. 
Additionally, one commenter suggested that the Commission adopt 
registration exemptions based on the temporary registration no-action 
relief issued in connection with the ANPR, and several commenters 
suggested that the Commission adopt the NFA Proposal, the MFA Proposal 
and the temporary registration no-action relief. Commenters offered 
various recommendations as to CPO and CTA registration exemption rules 
the Commission should adopt in furtherance of the ANPR. In particular, 
commenters requested clarification of the application of exemptive 
relief in the fund-of-funds context. The Commission similarly has taken 
these comments into account in the proposals it is making below.
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    \29\ Letters were submitted by: a registered futures 
association; two futures industry trade associations; four hedge 
funds and their managers; one exempt CPO; one national securities 
exchange; two contract markets; seven law firms; two attorneys; two 
bar associations; and one certified public accounting firm.
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III. The Proposals

    The relief the Commission is proposing today is consistent with the 
purpose and intent of the CFMA, and with the input the Commission has 
received in connection with its prior initiatives (i.e., the Prior Rule 
4.5 Proposal, the ANPR, and the Roundtable). Accordingly, it is 
intended to allow greater flexibility and innovation, and to take into 
account market developments and the current investment environment, by 
modernizing the requirements for determining who should be excluded 
from the CPO definition, and who should remain within the CPO and CTA 
definitions but be exempt from registration. Thus, this relief is 
intended to encourage and facilitate participation in the commodity 
interest markets by additional collective investment vehicles and their 
advisers, with the added benefit to all market participants of 
increased liquidity.

A. Proposed Amendment to Rule 4.5: Deleting Trading Criteria for 
Exclusion From the CPO Definition

    Currently, Rule 4.5(c)(2)(i) provides that the Notice of 
Eligibility must contain a representation that the eligible person will 
operate the qualifying entity such that the entity:

Will use commodity futures or commodity options contracts solely for 
bona fide hedging purposes within the meaning and intent of [Rule] 
1.3(z)(1); Provided, however, That in addition, with respect to 
positions in commodity futures or commodity option contracts which 
do not come within the meaning and intent of [Rule] 1.3(z)(1), a 
qualifying entity may represent that the aggregate initial margin 
and premiums required to establish such positions will not exceed 
five percent of the liquidation value of the qualifying entity's 
portfolio, after taking into account unrealized profits and 
unrealized losses on any such contracts it has entered into; And, 
Provided further, That in the case of an option that is in-the-money 
at the time of purchase, the in-the-money amount as defined in 
[Rule] 190.01(x) may be excluded in computing such 5 percent.

    This representation has come to be known as the ``Five Percent 
Test.''
    Because futures margins have generally been set at levels near or 
below 5 percent of contract value, the Five Percent Test has permitted 
the notional value of non-hedging commodity futures and option 
positions to approximate the liquidation value of an entity's 
portfolio. Recently, however, eligible persons and qualifying entities 
have expressed concern to Commission staff over the Five Percent Test, 
because margin levels for certain stock index futures have come to 
significantly exceed 5 percent of contract value, thereby limiting the 
use of such contracts in non-hedging strategies to a much greater 
extent than other types of contracts with lower margins. They also have 
expressed concern that a similar constraint could arise with respect to 
security futures contracts, because the required margin for security 
futures is 20 percent of contract value.\30\ In response to these 
concerns, the Commission proposed to amend Rule 4.5 by adding as an 
alternative to the Five Percent Test a limitation based on the notional 
value of non-hedge positions, i.e., that:
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    \30\ See CFTC Rule 41.45(b)(1) and Securities and Exchange 
Commission (SEC) Rule 242.403(b)(1), 67 FR 53146, 53174 and 53179, 
respectively (Aug. 14, 2002).

the aggregate notional value of [non-hedge commodity interest] 
positions does not exceed the liquidation value of the qualifying 
entity's portfolio, after taking into account unrealized profits and 
unrealized losses on any such contracts it has entered into. For 
[this purpose], the term ``notional value'' shall be calculated for 
each such futures position by multiplying the size of the contract, 
in contract units, by the current market price per unit and for each 
such option position by multiplying the size of the contract, in 
contract units, by the strike price per unit.\31\
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    \31\ 67 FR 65743, 65746.

    However, by this Federal Register release and in furtherance of the 
ANPR, the Commission is proposing to provide an additional exemption 
from CPO registration relief based solely on pool participant 
sophistication, without any requirement that the pool operator must be 
subject to another regulatory scheme and without any restriction 
whatsoever on the purpose or scope of the pool's commodity interest 
trading.\32\ Since the eligible persons and qualifying entities of Rule 
4.5 are, as stated in the title of the rule, ``otherwise regulated,'' 
the Commission believes that, like the unregulated CPOs for whom it is 
proposing relief below, these persons

[[Page 12626]]

and entities may not need to be subject to any commodity interest 
trading criteria to qualify for relief under Rule 4.5. The Commission 
further believes that the absence of such criteria may render obsolete 
the current disclosure requirement in Rule 4.5(c)(2)(iii).
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    \32\ The Commission is proposing this relief, which is based on 
the MFA Proposal, in new Rule 4.13(a)(4), discussed below.
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    Accordingly, the Commission is proposing to delete paragraphs 
(c)(2)(i) and (c)(2)(iii) from Rule 4.5. This would result in 
paragraphs (c)(2)(ii) and (c)(2)(iv) of the rule, which concern the 
other representations that the Notice of Eligibility must contain, 
being redesignated as paragraphs (c)(2)(i) and (c)(2)(ii), 
respectively. Thus, the Rule 4.5 operating criteria would continue to 
include: (1) A prohibition against marketing a qualifying entity as a 
commodity pool or otherwise as a vehicle to trade commodity interests; 
and (2) a requirement to submit to special calls to demonstrate 
compliance with eligibility for relief under Rule 4.5. The Commission 
believes it is appropriate to maintain the marketing restriction 
because, unlike the case with the proposed CPO registration exemption, 
members of the retail public may participate in the trading vehicles 
subject to Rule 4.5. The Commission nonetheless requests comment on the 
merits of maintaining current Rule 4.5(c)(2)(ii) (which would be 
redesignated as Rule 4.5(c)(2)(i)).

B. Proposed Amendments to Rule 4.13: Expanding and Adding CPO 
Registration Exemptions

1. Proposed Amendments to Rule 4.13(a)(2): Expanding the Current 
Exemption
    Rule 4.13(a)(2) currently provides that a person is exempt from 
registration as a CPO if:

    (2)(i) The total gross capital contributions it receives for 
units of participation in all of the pools that it operates or that 
it intends to operate do not in the aggregate exceed $200,000; and
    (ii) None of the pools operated by it has more than 15 
participants at any time. For purposes of computing the number of 
participants for paragraph (a)(2)(ii) of this section, the following 
participants shall be excluded:
    (A) The pool's operator, commodity trading advisor, and the 
principals thereof; and
    (B) Any relative, spouse or relative of such spouse living in 
the same household as such participant.

    The Commission adopted the exemptive criteria of Rule 4.13(a)(2) in 
1981.\33\ In light of the rate of inflation in the more than twenty 
years since that time and Commission staff's experience in 
administering Rule 4.13(a)(2), the Commission is proposing various 
amendments that will update and clarify the rule, making it available 
to more persons.
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    \33\ See 46 FR 26004, 26006 (May 8, 1981).
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    First, the Commission is proposing to increase the total of the 
gross capital contributions criterion under Rule 4.13(a)(2) to $400,000 
from $200,000.\34\ This proposed amount ($400,000) reflects adjustments 
to the current amount ($200,000) based on the Consumer Price Index 
published by the Bureau of Labor Statistics of the United States 
Department of Labor.\35\
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    \34\ One of the commenters on the ANPR suggested a similar 
increase.
    \35\ See http://data.bls.gov/cgi-bin/cpicalc.pl, where the ``CPI 
Inflation Calculator'' made available on that page (for values less 
than $10,000) determines that $2,000 in 1981 has the same buying 
power as $3958.20 in 2002.
---------------------------------------------------------------------------

    Second, the Commission is proposing to expand the range of 
participants excluded from the ``no more than 15 participants'' 
limitation of the rule and to clarify that the contributions of these 
participants do not count toward the capital contributions limit of the 
rule.\36\ This clarification would require a reorganization of Rule 
4.13(a)(2) such that, as proposed, the rule would provide that a person 
is exempt from CPO registration if:

    \36\ See CFTC Staff Letter 99-41 (Aug. 27, 1999), where, in 
permitting a CPO to exlcude the contributions of itself and its 
spouse in determining whether the contribution limit (of $200,000) 
of Rule 4.13(a)(2) has been met, Commission staff explained:
    Paragraph (a)(2)(i) of Rule 4.13 does not address whether the 
gross capital contributions to a pool by its operator or advisor 
should be excluded from the $200,000 limit in the rule, even though 
a pool's operator, advisor, and the principals thereof specifically 
are excluded from the ``no more than fifteen participants'' limit in 
paragraph (a)(2)(ii) of the rule. That paragraph provides that for 
the purposes of computing the number of participants allowable in a 
pool for which the operator thereof seeks to claim an exemption from 
registration under Rule 4.13(a)(2), the pool's operator, advisor and 
their principals are excluded. This provision was patterned after 
Rule 501(e)(1)(i) under the Securities Act of 1933 (`the '33 Act'), 
which provides that for the purposes of computing the number of non-
accredited purchasers allowed to participate in an exempt offering 
under Rule 506 under the '33 Act, `the following purchasers shall be 
excluded: any relative, spouse or relative of the spouse of a 
purchaser who has the same principal residence as the purchaser.' 
Since Rule 506 provides an exemption from the registration of 
securities otherwise required under the '33 Act for limited offers 
and sales without regard to the dollar amount of the offering, the 
exemptive rules under the '33 Act need not, and do not, make any 
mention of excluding the capital contributions of persons who are 
excluded from the computation of non-accredited purchasers. 
(Footnotes omitted).

    (2)(i) None of the pools operated by it has more than 15 
participants at any time; and
    (ii) The total gross capital contributions it receives for units 
of participation in all of the pools it operates or that it intends 
to operate do not in the aggregate exceed $400,000.
    (iii) For the purposes of determining eligibility for exemption 
under paragraph (a)(2) of this section, the person may exclude the 
following participants and their contributions:
    (A) The pool's operator, commodity trading advisor, and the 
principals thereof;
    (B) A child, sibling or parent of any of these persons;
    (C) The spouse of any person specified in paragraph 
(a)(2)(iii)(A) or (B) of this section; and
    (D) Any relative of a person specified in paragraph 
(a)(2)(iii)(A), (B) or (C) of this section, its spouse or a relative 
of its spouse, who has the same principal residence as such person.

2. Proposed Rule 4.13(a)(3): Adding a Limited Trading Exemption
    Proposed Rule 4.13(a)(3) is based on the NFA Proposal and also on 
the Commission's Prior Rule 4.5 Proposal. It would provide an exemption 
from CPO registration where the pool a person operates engages in a 
limited amount of commodity interest trading--i.e., by committing a 
limited amount of the liquidation value of the pool's portfolio to 
establish commodity interest trading positions, whether entered into 
for bona fide hedging purposes or otherwise, or where the aggregate net 
notional value of the pool's commodity interest trading does not exceed 
fifty percent of the pool's liquidation value. The Commission's 
proposal does, however, differ from the NFA Proposal in certain 
respects. It would limit the amount that could be committed to 
establish commodity interest positions to two percent of the 
liquidation value of a pool's portfolio, whereas the NFA Proposal would 
establish a five percent limit. The Commission believes that the lower 
amount it is proposing may be more appropriate than the NFA amount 
because it is closer to the ``de minimis'' level of commodity interest 
trading that the rule is intended to encompass, and, further, because 
the level of investor qualification proposed under the rule--i.e., that 
of an ``accredited investor''--is not a particularly high threshold to 
meet.\37\ Moreover, the rule would provide, through its alternative 
test, another means for CPOs to come within

[[Page 12627]]

its exemptive criteria.\38\ The Commission also believes that, unlike 
the NFA Proposal, Rule 4.13(a)(3) should not differentiate between 
trading for bona fide hedging and non-hedging purposes, because, as 
stated above, the rule is intended to apply to de minimis situations, 
where commodity interest trading--regardless of its purpose--is 
strictly limited. The Commission notes that two commenters on the ANPR 
suggested that the Commission should not distinguish between hedge and 
non-hedging positions, claiming that such distinctions between these 
two types of trading are difficult to administer. However, one 
commenter specifically suggested that the Commission should distinguish 
between hedge and non-hedge activity in setting a de minimis standard. 
Accordingly, the Commission specifically requests comments on whether 
under the rule there should be: (1) A higher percentage of assets that 
may be committed to establish commodity interest positions; and (2) any 
greater ability to trade commodity interests for bona fide hedging 
purposes than for non-hedging purposes, including whether there should 
be any restriction whatsoever on trading for hedging purposes. To 
assist persons in providing such comments, set forth below is a chart 
with examples of the application of the various tests under the NFA's 
and the Commission's proposals, with ``LV'' standing for the pool's 
liquidation value and ``NT'' standing for the notional test.
---------------------------------------------------------------------------

    \37\ Rule 501(a) under the Securities Act defines a natural 
person ``accredited investor'' as:
    (5) Any natural person whose individual net worth, or joint net 
worth with that person's spouse, at the time of his purchase exceeds 
$1,000,000; [or]
    (6) Any natural person who had an individual income in excess of 
$200,000 in each of the two most recent years or joint income with 
that person's spouse in excess of $300,000 in each of those years 
and has a reasonable expectation of reaching the same income level 
in the current year.
    The chart below illustrates that a significant number of 
commodity interest contracts could be established under the proposed 
``Two Percent Test.''
    \38\ The Commission has patterned this alternative test on the 
temporary registration no-action relief it issued for CPOs and CTAs 
in the ANPR, which in turn the Commission had based on the Prior 
Rule 4.5 Proposal.

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                    Initial
                      Contracts                         LV  ($)     50% LV     5% LV      2% LV    Margin  9/   Settlement       Contract      Contracts    Contracts    Contracts    Contracts
                                                                     ($)        ($)        ($)     26/02 ($)  level  9/25/02    Value  ($)      5%  Test     2% Test         NT       50% LV NT
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
S&P..................................................        10m         5m    500,000    200,000     17,813          819.29      204,822.50           28           11           48           24
T-Note...............................................        10m         5m    500,000    200,000      1,755      114,160.00      114,160.00          284          113           87           43
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

    In response to comments, the Commission is clarifying in Proposed 
Rule 4.13(a)(3)(i) that the pool may at any time meet either of these 
tests; compliance with the criteria of a test is determined at the time 
the most recent position is established; the criterion of paragraph 
(a)(3)(i)(B) applies on a net basis; and the calculation of ``notional 
value'' under paragraph (a)(3)(i)(B) now includes the number of futures 
and options contracts and any multiplier specified in those 
contracts.\39\ While the Commission believes either criterion is an 
appropriate limited trading standard, it nonetheless specifically 
requests comment on the proposed ``Two Percent Test.''
---------------------------------------------------------------------------

    \39\ The Commission also is making these clarifications in the 
temporary no-action relief it is maintaining below.
---------------------------------------------------------------------------

    As with the NFA Proposal, this new rule would require that each 
participant in the pool is an ``accredited investor'' and would require 
a person claiming relief thereunder to ``not market participations in 
the pool as or in a vehicle for trading in the commodity futures or 
commodity options markets.'' In response to comments on the ANPR, the 
Commission is further clarifying in Proposed Rule 4.13(a)(3) that a CPO 
claiming relief thereunder could also operate certain other pools--
i.e., the pools meeting the criteria of Rule 4.13(a)(4), discussed 
below--without voiding the availability of the relief under either 
rule.\40\
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    \40\ This provision, and the reciprocal provision of Rule 
4.13(a)(4), do not include persons and pools meeting the criteria of 
Rule 4.13(a)(1) or 4.13(a)(2). This is because Rule 4.13(a)(1) is 
available where, among other things, only one pool is being operated 
and Rule 4.13(a)(2) would take the operations of such pools into 
account in computing whether the contribution and participant 
limitations of the rule had been met.
---------------------------------------------------------------------------

3. Proposed Rule 4.13(a)(4): Adding an Exemption Where Pool 
Participants Meet Specified Sophistication Criteria
    Proposed Rule 4.13(a)(4) is based on the MFA Proposal. It provides 
that a person is exempt from CPO registration if interests in the pool 
for which it seeks to claim relief (1) are exempt from registration 
under the Securities Act of 1933, and (2) are offered and sold without 
marketing in the United States (U.S.). In addition, the CPO must 
reasonably believe that: (1) Natural person participants are 
``qualified eligible persons [QEPs],'' as that term is defined in Rule 
4.7(a)(2);\41\ and (2) non-natural person participants are QEPs under 
Rule 4.7 or ``accredited investors.'' While the MFA Proposal would 
include any natural person who is a QEP under Rule 4.7, the Commission 
does not believe that proposed Rule 4.13(a)(4) needs to be so broad in 
light of both the absence of any trading limitations therein and the 
other, alternative criteria being proposed in Rule 4.13(a)(3). Thus, 
the Commission believes that the Rule 4.7(a)(2) standards for natural 
persons--e.g., persons who are ``qualified purchasers'' under Section 
2(a)(51)(A) of the ICA \42\--may be more appropriate for the rule. The 
Commission nonetheless specifically requests comment on what investor 
qualifications would be appropriate under Rule 4.13(a)(4) and whether 
all natural person QEPs should be included for purposes of proposed 
Rule 4.13(a)(4).
---------------------------------------------------------------------------

    \41\ Specifically, natural persons who come within the MFA 
Proposal but not proposed Rule 4.14(a)(4) include persons who are 
``accredited investors'' and who meet the Portfolio Requirement of 
Rule 4.7(a)(1)(v), in that they own securities having an aggregate 
market value of at least $2,000,000, have futures margin and option 
premiums on deposit of at least $200,000, or own a portfolio with a 
proportionate combination of these two types of assets.
    \42\ 15 U.S.C. 80a-2(a)(51)(A) (2000), which defines a natural 
person ``qualified purchaser'' as:
    (i) any natural person (including any person who holds a joint, 
community property, or other similar shared ownership interest in an 
issuer that is excepted under section 80a-3(c)(7) of this title with 
that person's qualified purchaser spouse) who owns not less than 
$5,000,000 in investments, as defined by the [SEC]; or
    (iv) any person, acting for its own account or the accounts of 
other qualified purchasers, who in the aggregate owns and invests on 
a discretionary basis, not less than $25,000,000 in investments.
    Rule 2a51-1(b) under the ICA defines ``investments'' generally 
to include (when held for investment purposes, as defined in the 
rule): securities; real estate; commodity interests; physical 
commodities; and cash and cash equivalents. Pursuant to ICA Rule 
2a51-1(e), the amount of outstanding indebtedness incurred to 
acquire investments must be deducted from the amount of owned and 
invested investments when determining if the person is a ``qualified 
purchaser.''
---------------------------------------------------------------------------

    Here, too, and in response to the comments received on the ANPR, 
Rule 4.13(a)(4) would make clear that a CPO claiming relief thereunder 
could also operate pools meeting the criteria of Rule 4.13(a)(3) 
without voiding the availability of the relief under either rule.
4. Additional Provisions Under Rule 4.13
    Under the proposed amendments, Rule 4.13 would also contain 
introductory text and certain additional provisions, which would be 
based on the provisions of the existing rule, the NFA Proposal, the MFA 
Proposal and the comments on the ANPR. Generally speaking, these 
provisions concern: certain disclosures that a CPO who has claimed 
relief under the rule must make

[[Page 12628]]

to prospective participants (proposed paragraph (a)(5)); the notice of 
registration exemption that the CPO would be required to file (proposed 
paragraph (b)); \43\ the CPO's obligations with respect to books and 
records, special calls, annual reports, and monthly statements \44\ 
(proposed paragraph (c)); the CPO's obligations in the event it 
subsequently applies for registration (proposed paragraph (d)); \45\ 
and the effect of registration on a CPO who: (1) Is eligible for 
exemption under Rule 4.13 but registers as a CPO nonetheless (proposed 
paragraph (e)(1)); or (2) operates one or more pools for which it is 
required to register, and is registered, as a CPO and one or more pools 
for which it is eligible to claim an exemption from registration under 
Rule 4.13(a)(3) or 4.13(a)(4) (proposed paragraph (e)(2)).\46\
---------------------------------------------------------------------------

    \43\ In addition to current requirements, the CPO would be 
required to provide its main facsimile number and main email 
address.
    \44\ Consistent with current Rule 4.13, the requirement to 
furnish monthly statements would be applicable solely to CPOs 
claiming relief under paragraph (a)(1) or (a)(2) of the rule.
    \45\ Also consistent with the current provisions of Rule 4.13, 
the obligation to file an annual report for its pool in the event 
the CPO subsequently applies for registration would be applicable to 
CPOs claiming relief under paragraph (a)(1) or (a)(2) of the rule. 
This obligation would not also be applicable to CPOs claiming relief 
under paragraph (a)(3) or (a)(4) of the rule, because the pool's 
annual report would not provide information sufficient to determine 
whether or not the CPO had been in compliance with the applicable 
criteria (i.e., trading limitations and/or investor qualifications) 
throughout the pool's fiscal year.
    \46\ For the reasons provided above in its discussions of 
proposed paragraphs (a)(3) and (a)(4), the Commission has not 
included CPOs eligible for relief under paragraph (a)(1) or (a)(2) 
in proposed paragraph (e)(2).
---------------------------------------------------------------------------

5. Alternative Proposal for Relief
    As an alternative to the foregoing proposals for certain CPOs, and 
the following proposals for certain CTAs, the Commission seeks comment 
on adoption of a notice registration scheme. The notice registration 
approach would be identical to the proposed exemption approach with 
respect to information required to be filed with the Commission and 
compliance with Part 4 requirements. Specifically, the Commission seeks 
comment on whether a notice registration scheme could make it more 
clear to the public and other regulatory authorities that this group of 
CPOs and CTAs remains subject to the CFTC's jurisdiction under the CEA, 
the Bank Secrecy Act and other statutes, while providing the same 
amount of regulatory relief as the proposed exemption.

C. Proposed Amendments to Rule 4.14: Expanding and Adding CTA 
Registration Exemptions

1. Proposed Amendments to Rule 4.14(a)(8)
a. Exemption for State-Registered Investment Advisers (IAs)
    Currently, Rule 4.14(a)(8) provides an exemption from CTA 
registration for certain IAs registered as such, or excluded from such 
registration, under the Investment Advisers Act of 1940 (IAA) \47\ who 
provide commodity interest trading advice to Rule 4.5 trading vehicles 
and who meet certain other criteria-- e.g., they do not otherwise hold 
themselves out as a CTA.
    When the Commission adopted Rule 4.14(a)(8) in 1987,\48\ absent the 
availability of an exemption, an IA was required to be registered under 
the IAA to be eligible for the CTA registration exemption provided by 
the rule. As a result of the National Securities Markets Improvement 
Act of 1996 \49\ and SEC rules issued thereunder, IAs may not register 
with the SEC unless they have $25 million under management; \50\ IAs 
who do not meet this criterion must register with state regulatory 
authorities.\51\ To update Rule 4.14(a)(8), and in response to 
Roundtable comments, the Commission is proposing to amend the rule so 
as to make it equally available to SEC-registered or excluded-from-
registration IAs and state-registered IAs (proposed Rule 
4.14(a)(8)(i)). Further, to conform the rule with the changes the 
Commission is proposing to make to Rule 4.5, as are discussed above 
(e.g., deletion of the existing limitation on non-hedge commodity 
interest trading), the Commission is proposing to delete from Rule 
4.14(a)(8) the current requirement that the IA's commodity interest 
advice ``[e]mploys only such strategies as are consistent with 
eligibility status under Sec.  4.5.''
---------------------------------------------------------------------------

    \47\ 15 U.S.C. 80b-1 et. seq. (2000).
    \48\ See 52 FR 41975 (Nov. 2, 1987).
    \49\ Pub L. No. 104-290, 110 Stat. 3416 (1996).
    \50\ SEC Rule 275.203A-1, 17 CFR 275.203A-1 (2002), provides 
that an IA is not required to register with the SEC unless it has at 
least $30 million in assets under management, but may register with 
the; SEC if if has between $25 million and $30 million in assets 
under management.
    \51\ 17 CFR 275.203A-1 (2002).
---------------------------------------------------------------------------

b. Exemption Where Advice Is Provided to Foreign Funds
    Also in response to Roundtable comments, and to acknowledge and 
codify Commission staff's activity in this area,\52\ the Commission is 
proposing relief from CTA registration for those IAs who provide 
commodity interest trading advice to commodity pools organized and 
operated outside of the U.S., its territories and possessions that meet 
certain criteria--for example, only non-U.S. persons may be pool 
participants, except for the pool's operator, advisor and their 
principals. (Proposed Rule 4.14(a)(8)(i)(C)(2)).
---------------------------------------------------------------------------

    \52\ See e.g., CFTC Staff Letter No. 00-96 (Oct. 4, 200).
---------------------------------------------------------------------------

c. Exemption Where Advice Is Provided to Rule 4.13(a)(3) and 4.13(a)(4) 
Pools
    Further, and based on the NFA Proposal, the Commission is proposing 
CTA registration relief for advisors to commodity pools that meet the 
requirements of the new exemptions being proposed based upon 
participant sophistication or trading limitations. (Proposed Rule 
4.14(a)(8)(i)(D)). In response to the comments on the ANPR, the 
Commission also has included a proviso in this proposal to make clear 
that a person may claim relief from CTA registration if it also advises 
the other trading vehicles specified in the rule--e.g., qualifying 
entities under Rule 4.5. (Proposed Rule 4.14(a)(8)(i)(A)).
    The foregoing relief would remain subject to compliance with the 
existing criteria of Rule 4.14(a)(8)--i.e., that the person provides 
commodity interest trading advice solely incidental to its business of 
providing securities or other investment advice to the trading vehicles 
specified in the rule and that it is not otherwise holding itself out 
as a CTA. (Proposed Rules 4.14(a)(8)(ii)(A) and (B)).
    Several commenters on the registration no-action relief issued 
through the ANPR noted that, like the NFA Proposal, it only provided 
relief in the context of pools. They claimed that CTA registration 
relief should be available with respect to accounts that meet the 
criteria of Rule 4.14(a)(3) or 4.14(a)(4)--regardless of the form of 
the account (i.e., collective trading vehicle or individual account). 
In response, the Commission notes that because of the intermediation of 
these collective trading vehicles by CPOs to whom the Commission is 
herein proposing registration relief, it is appropriate to so restrict 
CTA registration relief. The Commission further notes the expanded 
availability of the relief from CTA registration in Section 4m(1) of 
the Act that it is proposing below.
2. Proposed Rule 4.14(a)(10): Counting Legal Organizations as a Single 
``Person'
    Section 4m(1) of the Act provides an exemption from CTA 
registration for any person:

who, during the course of the preceding twelve months, has not 
furnished commodity

[[Page 12629]]

trading advice to more than fifteen persons and who does not hold 
himself out generally to the public as a commodity trading advisor.

Where the ``person'' is a legal entity, the CFTC has ``looked through'' 
the entity and counted its owners for the purpose of determining 
whether the ``not more than fifteen persons'' criterion has been met.
    Congress patterned Section 4m(1) after Section 203(b)(3) of the 
IAA,\53\ which provides an exemption from IA registration for any IA:
---------------------------------------------------------------------------

    \53\ 15 U.S.C. 80b-3(b)(3) (2002).

who, during the course of the preceding twelve months has had fewer 
than fifteen clients and who neither holds himself out generally to 
the public as an investment adviser nor acts as an investment 
---------------------------------------------------------------------------
adviser to [certain trading vehicles].

However, by Rule 203(b)(3) under the IAA,\54\ the SEC has permitted IAs 
to count certain non-natural persons as a single client for the purpose 
of computing the ``fewer than fifteen clients'' criterion.
---------------------------------------------------------------------------

    \54\ 17 CFR 275.203(b)(3) (2002).
---------------------------------------------------------------------------

    In response to Roundtable comments on this difference in regulatory 
treatment, the Commission is proposing in new Rule 4.14(a)(10) to 
provide an exemption from registration for any CTA who meets the 
criteria of Section 4m(1) of the Act. (Proposed paragraph (a)(10).) For 
the purpose of this exemption, the CTA may deem certain persons a 
single person. In making this proposal, the Commission is patterning 
the single ``persons'' specified therein on the single ``clients'' 
specified in SEC Rule 203(b)(3).
3. Additional Provisions Under Rule 4.14
    Under the proposed amendments, Rule 4.14 would also contain 
introductory text and certain additional provisions, which would be 
based on the provisions of the current rule, the NFA Proposal and the 
comments on the ANPR. Generally speaking, these provisions concern: the 
notice of registration exemption that a CTA seeking exemption under 
paragraph (a)(8) must file (proposed paragraph (a)(8)(iii)); \55\ the 
CTA's obligations with respect to books and records and special calls 
(proposed paragraph (a)(8)(iv)); and the effect of registration on a 
CTA who: (1) is eligible for exemption under Rule 4.14, but registers 
as a CTA nonetheless (proposed paragraph (c)(l)); or (2) provides 
commodity interest trading advice to one or more clients for which it 
is required to register and one or more clients for which it is 
eligible to claim an exemption from registration under Rule 4.14(a)(8) 
(proposed paragraph (c)).
---------------------------------------------------------------------------

    \55\ In addition to current requirements, the CTA would be 
required to provide its main facsimile number and main e-mail 
address.
---------------------------------------------------------------------------

D. Proposed Amendments to Rules 4.21, 4.22 and 4.31

1. Permitting Communications Prior to Disclosure Document Distribution
    Commission Rules 4.21 and 4.31 prohibit CPOs and CTAs from 
soliciting prospective pool participants or clients prior to providing 
a Disclosure Document. However, the Commission has increasingly 
received comments, including testimony from Roundtable participants, 
that Rules 4.21(a) and 4.31(a) unnecessarily restrict communications by 
CPOs and CTAs. In response, the Commission is proposing to amend these 
rules to provide that the Disclosure Documents referred to therein must 
be delivered by no later than the time a CPO delivers a subscription 
agreement for the pool for which it is soliciting or a CTA delivers an 
advisory agreement for the trading program for which it is 
soliciting.\56\ To ensure compliance with the purpose of the Disclosure 
Document--i.e., that prospective investors are fully informed about all 
material facts before committing their funds,\57\ and consistent with 
the Roundtable comments, these proposed rule amendments would require 
that ``any material distributed in advance of the delivery of the 
Disclosure Document is consistent with or amended by the information 
contained in the Disclosure Document and with the obligations of the 
[CPO or CTA] under the Act, the Commission's regulations issued 
thereunder, and the laws of any other applicable federal or state 
authority.'' \58\
---------------------------------------------------------------------------

    \56\ Because this proposal would obviate the Rule 4.21(a)(2) 
``profile document'' and ``term sheet'' exceptions to the current 
Disclosure Document delivery requirement of Rule 4.21(a)(1), the 
Commission also is proposing to delete these exceptions from the 
rule.
    \57\ See, e.g., 44 FR 1918, 1920.
    \58\ See, e.g., Section 4m(2) of the Act, 7 U.S.C. 6m(2) (2000), 
which provides in pertinent part that:
    Nothing in this Act shall relieve any person of any obligation 
or duty, or affect the availability of any right or remedy available 
to the Securities and Exchange Commission or any private party 
arising under the Securities Act of 1933 or the Securities Exchange 
Act of 1934 governing the issuance, offer, purchase, or sale of 
securities of a commodity pool, or of persons engaged in 
transactions with respect to such securities, or reporting by a 
commodity pool.
---------------------------------------------------------------------------

2. Removing Duplicative Requirements in the ``Master/Feeder Fund'' 
Context
    As explained above, Rule 4.21 requires each person registered (or 
required to be registered) as a CPO to deliver a Disclosure Document to 
prospective participants in the commodity pool for which it is 
soliciting. Rule 4.22 requires the CPO to distribute periodic Account 
Statements \59\ and an Annual Report \60\ to the participants in the 
pool. Where the prospective or actual participant is another commodity 
pool, the CPO need only deliver a Disclosure Document and distribute 
periodic Account Statements and an Annual Report to the pool operator 
of the other commodity pool; the CPO need not also deliver and 
distribute this information to each of the participants in the other 
pool.
---------------------------------------------------------------------------

    \59\ Rule 4.22(a).
    \60\ Rule 4.22 (c).
    In addition to the other amendments it is proposing to Rule 
4.22, the Commission is proposing to delete from paragraph (c) of 
the rule the now obsolete requirement that the ``first fiscal year 
for which an Annual Report is due shall be the first fiscal year 
that begins on or after January 1, 1979.''
---------------------------------------------------------------------------

    Commission staff has provided relief on numerous occasions from the 
requirements of Rules 4.21 and 4.22 where the CPOs of two pools (i.e., 
a master fund and a feeder fund) were closely affiliated,\61\ a 
practice supported by Roundtable comments. Accordingly, the Commission 
is proposing to codify this relief in new Rules 4.21(a)(2), 4.22(a)(4) 
and 4.22(c)(6). Because Rules 4.7 and 4.12(b) provide relief from 
certain of the specific requirements of Rules 4.21 and 4.22, these 
proposed new rules would also include references to materials that must 
be furnished pursuant to Rule 4.7(b)(1) or 4.12(b)(2)(i), Rule 
4.7(b)(2) or 4.12(b)(2)(ii), and Rule 4.7(b)(3) or 4.12(b)(2)(iii), 
respectively, thereby further reducing the reporting burdens under 
Rules 4.7 and 4.12.
---------------------------------------------------------------------------

    \61\ See, e.g., CFTC Staff Letter No. 02-102 (Aug. 29, 2002).
---------------------------------------------------------------------------

3. Distributing Account Statements Electronically
    The Commission is also proposing to amend Rule 4.22 to establish 
the procedures pursuant to which a CPO may distribute periodic Account 
Statements to pool participants by electronic means, provided the CPO 
obtains the prior consent of each such participant. This proposal is 
patterned on the Commission's recent amendments to Rules 1.33 and 
1.46,\62\ which permit futures commission merchants to deliver monthly

[[Page 12630]]

statements electronically to their customers. Moreover, it would codify 
the Commission's prior interpretation that permitted, and provided 
guidance on, electronic distribution of Account Statements.\63\
---------------------------------------------------------------------------

    \62\ See 66 FR 53510 (Oct. 23, 2001).
    \63\ See 62 FR 39104, 39110-39111 (July 22, 1997).
---------------------------------------------------------------------------

    As proposed, before a CPO could electronically distribute Account 
Statements to a participant, new paragraph (b)(2) of Rule 4.22 would 
require the CPO to obtain a signed consent from the participant 
acknowledging that the CPO had disclosed the following information to 
it: the participant's right to receive Account Statements in paper form 
or electronically; the electronic medium or source through which the 
CPO will distribute the Account Statements; the duration of the period 
during which the consent to receive Account Statements electronically 
will be effective; any charges for electronic distribution; and the 
participant's right to revoke consent to electronic distribution at any 
time. For a participant that is not an ``institutional customer,'' \64\ 
the CPO would be required to obtain the participant's signed consent 
acknowledging the disclosures, prior to the transmission of any Account 
Statement by means of electronic media. Institutional customers would 
not need to provide written consent. New paragraph (h)(4) of Rule 4.22 
would establish the signature requirements for an Account Statement 
distributed electronically, by providing that ``for each pool for which 
the CPO distributes an Account Statement by means of electronic media, 
the CPO must make and keep * * * a manually signed copy'' of the oath 
or affirmation required under Rule 4.22(h).\65\
---------------------------------------------------------------------------

    \64\ Rule 1.3(g) defines ``institutional customer'' to have the 
same meaning as ``eligible contract participant'' as defined in 
Section 1a(12) of the Act.
    \65\ See 61 FR 42146, 42158 n.91 (Aug. 14, 1996), after which 
the Commission has patterned this proposal.
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    The Commission understands that there may be special concerns 
surrounding the electronic distribution of Annual Reports that are 
required to be certified by an independent public accountant and, in 
particular, surrounding the attachment of the certification itself that 
the public accountant provides with the report.\66\ Accordingly, the 
Commission is not now proposing any criteria pursuant to which a CPO 
may distribute the Annual Report electronically but, instead, the 
Commission is seeking comment on what those criteria should be.
---------------------------------------------------------------------------

    \66\ Rule 4.7(b)(3) permits a CPO who has claimed relief under 
the rule to distribute an Annual Report that is not certified, but 
that nonetheless must be presented and computed in accordance with 
generally accepted accounting principles consistently applied.
---------------------------------------------------------------------------

4. Providing Facsimile Signatures on Account Statements and Annual 
Reports
    In the preamble of the Federal Register release announcing the 
adoption of the oath or affirmation requirement of Rule 4.22(h), the 
Commission explained that ``a facsimile signature would be 
appropriate,'' provided the CPO maintains the Account Statement or 
Annual Report containing the manual signature from which the facsimile 
signature was made, and that an Annual Report that is filed with the 
Commission contains the manual signature.\67\ The Commission is 
proposing to codify this explanation in new paragraph (h)(4)(i) of Rule 
4.22. Inasmuch as the Commission recently has delegated to NFA the 
review of, among other documents, pool Annual Reports,\68\ this 
provision would refer to the Annual Report that the CPO files with a 
registered futures association.
---------------------------------------------------------------------------

    \67\ See 46 FR 26004, 26011 (May 8, 1981).
    \68\ See 67 FR 77470 (Dec. 18, 2002).
---------------------------------------------------------------------------

5. Conforming Signature Requirements
    Certain Part 4 rules, including several of the rules being proposed 
in this Federal Register release, provide that the various documents 
required thereunder must be signed by CPOs and CTAs. In particular, 
Rules 4.7(d), 4.12(b), 4.13(b), and 4.22(h) provide that the documents 
required thereunder must be signed by a CPO or CTA as follows: if it is 
a sole proprietorship, by the sole proprietor; if a partnership, by a 
general partner; and if a corporation, by the chief executive officer 
or chief financial officer.
    Upon review of this list of permitted signatories, the Commission 
believes that it may be unnecessarily restrictive in that it leaves no 
room for other organizational structures under which CPOs and CTAs 
operate--e.g., limited liability companies. Accordingly, the Commission 
is proposing to amend Rules 4.7(d), 4.12(b) and 4.13(b) to provide that 
the documents required thereunder ``must be signed by a duly authorized 
representative'' of the CPO or CTA. This would be consistent with 
existing signature requirements under Rules 4.5 and 4.14.\69\ And, as 
the Commission stated in connection with the adoption of Rule 4.5, a 
``duly authorized representative'' is ``a representative who has been 
authorized to bind the person on whose behalf [a document is produced] 
to the information and the representations contained in [the 
document].'' \70\ However, because the document required under Rule 
4.22(h) pertains to the accuracy and completeness of certain financial 
reports (i.e., commodity pool Account Statements and Annual Reports), 
the Commission specifically is proposing that this oath or affirmation 
be signed ``by a representative duly authorized to bind the pool 
operator.''
---------------------------------------------------------------------------

    \69\ See also, 67 FR 38869 (June 6, 2002), wherein the 
Commission adopted a similar signatory provision in connection with 
amendments to its registration rules to facilitate on-line 
registration.
    \70\ 50 FR 15868, 15874.
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IV. Temporary No-Action Relief

    By this Federal Register release, the Commission is, with certain 
modifications and clarifications made in response to comments on both 
the Prior Rule 4.5 Proposal and the ANPR, confirming the temporary no-
action relief it issued in the Prior Rule 4.5 Proposal and the 
ANPR.\71\ Specifically, in addition to providing temporary no-action 
relief where the pool a CPO operates engages in a limited amount of 
commodity interest trading, the Commission is clarifying that: at any 
time, either the limited trading or notional test must be met; 
compliance with the criterion of a test is determined at the time the 
most recent position is established; the notional test criterion 
applies on an aggregate net basis; and the calculation of ``notional 
value'' includes the number of futures and options contracts and any 
multiplier specified in those contracts.
---------------------------------------------------------------------------

    \71\ See 67 FR 65743, 65745 and 67 FR 68785, 68788-89, 
respectively, and the examples provided therein.
---------------------------------------------------------------------------

A. Temporary No-Action Relief for Rule 4.5 Eligible Persons

    The Commission will not commence any enforcement action against an 
eligible person for failure to register as a CPO in accordance with 
Section 4m(1) of the Act, where the eligible person operates a 
qualifying entity such that at any time, with respect to non-hedge 
positions in commodity futures or commodity option contracts, either of 
the following tests is met:

    (i) The aggregate initial margin and premiums required to 
establish such positions, determined at the time the most recent 
position was established, does not exceed five percent of the 
liquidation value of the qualifying entity's portfolio, after taking 
into account unrealized profits and unrealized losses on any such 
contracts it has entered into; Provided, That in the case of an 
option that is in-the-money at the time of purchase, the in-the-
money amount as defined in Rule 190.01(x) may be excluded in 
computing such five percent; or
    (ii) The aggregate net notional value of such positions, 
determined at the time the

[[Page 12631]]

most recent position was established, does not exceed the 
liquidation value of the qualifying entity's portfolio, after taking 
into account unrealized profits and unrealized losses on any such 
contracts it has entered into. For this purpose, the term ``notional 
value'' should be calculated for each such futures position by 
multiplying the size of the contract, in contract units (taking into 
account any multiplier specified in the contract), by the current 
market price per unit and for each such option position by 
multiplying the size of the contract, in contract units (taking into 
account any multiplier specified in the contract), by the strike 
price per unit.

    Neither eligible persons who have claimed relief under Rule 4.5 nor 
eligible persons who claim such relief in the future need to take any 
additional action to operate their qualifying entities in accordance 
with the notional test. Rather, making the representations currently 
required by the rule in a Notice filed with the NFA and the 
Commission--including the representation concerning the Five Percent 
Test--is all that is required.
    This relief will remain in effect until such time as the Commission 
takes final action on the amendment to Rule 4.5 it is proposing herein. 
This relief is, however, subject to the condition that, upon adoption 
of any amendment to Rule 4.5, the eligible person must comply in full 
with the terms of any amendment the Commission may adopt. When the 
Commission adopts a final rule, it will, if necessary, provide affected 
eligible persons and qualifying entities with sufficient time within 
which to comply with the rule adopted or to liquidate positions entered 
into in accordance with the no-action relief.

B. CPO and CTA Temporary Registration No-Action Relief

1. Relief for CPOs
a. In General
    The Commission will not commence any enforcement action against a 
CPO for failure to register as a CPO under Section 4m(1) of the Act, 
where each pool for which the CPO claims registration no-action relief 
hereunder meets and remains in compliance with the following criteria:

    a. Participation in the pool is restricted to: ``accredited 
investors'' as defined in Rule 501(a) under the Securities Act; 
``knowledgeable employees'' as defined in Rule 3c-5 under the 
Investment Company Act of 1940; \72\ Non-U.S. persons as defined in 
CFTC Rule 4.7(a)(1)(iv); and the persons described in CFTC Rule 
4.7(a)(2)(viii)(A); and
---------------------------------------------------------------------------

    \72\ 17 CFR 270.3c-5 (2002).
---------------------------------------------------------------------------

    (ii) At any time, the pool's commodity interest trading, whether 
entered into for bona fide hedging purposes or otherwise,\73\ meets 
either of the following tests:
---------------------------------------------------------------------------

    \73\ See Rule 1.3(z).
---------------------------------------------------------------------------

    (A) The aggregate initial margin and premiums required to 
establish commodity interest positions, determined at the time the 
most recent position was established, does not exceed two percent of 
the liquidation value of the pool's portfolio, after taking into 
account unrealized profits and unrealized losses on any such 
positions it has entered into; Provided, That in the case of an 
option that is in-the-money at the time of purchase, the in-the-
money amount as defined in Rule 190.01(x) may be excluded in 
computing such two percent; or
    (B) The aggregate net notional value of the pool's commodity 
interest positions, determined at the time the most recent position 
was established, does not exceed fifty percent of the liquidation 
value of the pool's portfolio, after taking into account unrealized 
profits and unrealized losses on any such positions it has entered 
into. For this purpose, the term `notional value' should be 
calculated for each such futures position by multiplying the number 
of contracts by the size of the contract, in contract units (taking 
into account any multiplier specified in the contract), by the 
current market price per unit and for each such option position by 
multiplying the number of contracts by the size of the contract, in 
contract units (taking into account any multiplier specified in the 
contract), by the strike price per unit.
b. CPOs Who Operate ``Funds-of-Funds''
    In a footnote to the ANPR, the Commission addressed the situation 
where a commodity pool indirectly trades commodity interests as a 
``fund of funds.'' \74\ As the Commission stated:
---------------------------------------------------------------------------

    \74\ See 67 FR at 68788, n. 15.

    The operator of a `fund of funds' (an Investor Fund) that 
indirectly trade[s] commodity interests through participation in one 
or more funds that directly trades commodity interests (each an 
Investee Fund) could claim exemption from registration under the No-
Action Relief where that Investor Fund trades commodity interests 
solely through participation in one or more Investee Funds, and the 
CPO of each such Investee Fund has itself claimed the No-Action 
Relief. The operator of an Investor Fund that additionally directly 
trades commodity interests could also claim the no-action relief, so 
long as the portion of the Investor Fund that directly trades 
---------------------------------------------------------------------------
commodity interests does not exceed the limit referred to above.

The Commission provided the following example of this situation:

    For example, assume that the Investor Fund has a liquidation 
value of $1 million, four-fifths of which is invested in four 
Investee Funds whose operators have claimed the No-Action Relief. 
With the remaining one-fifth of liquidation value, or $200,000, the 
operator of the Investor Fund may have the Fund directly trade 
commodity interests, provided that the notional value of the Fund's 
commodity interest positions does not exceed fifty percent of the 
Fund's liquidation value, adjusted for unrealized profits and 
unrealized losses on positions directly entered into by the Fund.

The Commission went on to state that:

    If, however, the notional value of those positions exceeded 
fifty percent of the liquidation value of $200,000, the operator 
would only be able to claim the No-Action Relief if the operator 
knew that the notional value of all of the Investor Fund's commodity 
interest positions (i.e., those held outright and those held through 
investment in the four Investee Funds) was fifty percent of the 
Investor Fund's liquidation value. To be in possession of such 
information, the operator would need to have direct knowledge of, 
and immediate access to, the notional value of the commodity 
interest positions of each Investee Fund. The operator of the 
Investor Fund could have this knowledge and access where, for 
example, it was the same person as, or an affiliate of, the CPOs of 
the Investee Funds.

    In response to these examples, the Commission received two sets of 
comments. One set claimed that, under these examples, it appeared that 
fund-of-funds CPOs wishing to claim the no-action relief could invest 
only in pools operated by CPOs who had themselves already claimed the 
no-action relief, to the disadvantage of registered CPOs. The other set 
of comments claimed that the requirements for ``direct knowledge of'' 
and ``immediate access to'' Investee Funds set unnecessarily high 
standards. The Commission believes these comments have merit. 
Accordingly, by this Federal Register release the Commission confirms 
that: (1) The CPO of a fund-of-funds may claim the registration no-
action relief provided herein if the CPO of each of the Investee Funds 
into which the fund-of-funds invests either has registered with the 
Commission as a CPO or has claimed the no-action relief with respect to 
the Investee Fund; and (2) regardless of whether the CPO of the 
Investee Fund was an unregistered CPO that had claimed the registration 
no-action relief or a registered CPO, in each case the Investor Fund's 
CPO would be entitled to rely upon a representation by the Investee 
Fund's CPO that the CPO was operating the Investee Fund in compliance 
with the requirements of the no-action relief. Additionally, by this 
Federal Register release, the Commission generally seeks comment on how 
to treat ``funds-of-funds'' in the context of CPO registration and Rule 
4.13.
2. Relief for CTAs
    The Commission will not commence enforcement action against a CTA 
for failure to register as a CTA under Section 4m(1) of the Act, where 
the CTA

[[Page 12632]]

meets and remains in compliance with the following criteria:

    a. It claims relief from CPO registration under the no-action 
relief provided herein and its commodity interest trading advice is 
directed solely to, and for the sole use of, the pool or pools that 
it operates; \75\ or
---------------------------------------------------------------------------

    \75\ This provision is patterned after Rule 4.14(a)(5).
---------------------------------------------------------------------------

    b. It is registered as an investment adviser under the 
Investment Advisers Act of 1940 or with the applicable securities 
regulatory agency of any State, or it is exempt from such 
registration, or it is excluded from the definition of the term 
``investment adviser'' pursuant to section 202(a)(2) or 202(a)(11) 
of the Investment Advisers Act of 1940, provided that:
    (A) The person's commodity interest trading advice:
    (1) Is directed solely to, and for the sole use of, pools 
operated by CPOs who are eligible to claim relief from CPO 
registration under the no-action relief;
    (2) Is solely incidental to its business of providing securities 
advice to each such pool;
    (3) Is consistent with the criteria of the CPO registration no-
action relief; \76\ and
---------------------------------------------------------------------------

    \76\ In response to comments received by the Commission, this 
provision was simplified by replacing the words ``Employs only 
strategies that are'' with ``Is.''
---------------------------------------------------------------------------

    (B) The person is not otherwise holding itself out as a CTA.

    By this Federal Register release, the Commission similarly confirms 
that, regardless of whether a pool to which the CTA sought to provide 
commodity interest trading advice was operated by an unregistered CPO 
that had claimed registration no-action relief or a registered CPO, in 
each case the CTA would be entitled to rely upon a representation by 
the CPO that the CPO was operating the pool in compliance with the 
requirements of the CPO registration no-action relief stated above.
3. Claim of Registration No-Action Relief
    As stated in the ANPR, this registration no-action relief for CPOs 
and CTAs is not self-executing. Rather, a CPO or CTA eligible for the 
no-action relief must file a Claim to perfect the relief and must make 
a one-way disclosure to its participants and clients, respectively, 
whether prospective or existing. A Claim of Registration No-Action 
Relief will be effective upon filing, so long as the Claim is 
materially complete.
    Specifically, the Claim of Registration No-Action Relief must:
    a. State the name, main business address, and main business 
telephone number of the CPO or CTA claiming the relief;
    b. State the capacity (i.e., CPO, CTA or both) and, where 
applicable, the name of the pool(s), for which the Claim is being 
filed;
    c. Represent that the CPO and CTA qualifies for the no-action 
relief, that it will comply with the criteria of the no-action relief, 
and that it will provide the CFTC-specified disclosure, set forth 
below;
    d. Be signed by a duly authorized representative of the CPO or CTA; 
and
    e. Be filed with the NFA at its headquarters office in Chicago, 
Illinois (Attn: Director of Compliance), with a copy to the Commission 
at its headquarters office in Washington, DC (Attn: Division of 
Clearing and Intermediary Oversight, Audit and Financial Review 
Section), prior to the date upon which the CPO or CTA first engages in 
business that otherwise would require registration as such.
4. One-Way Disclosure by CPOs and CTAs
    a. For CPOs: To comply with the terms of a Claim of Registration 
No-Action Relief that it has filed, a CPO must provide the following 
disclosure to prospective and existing participants in each pool it 
operates or intends to operate prior to engaging in activities that 
otherwise would require it to register as a CPO:

    Pursuant to No-Action Relief issued by the Commodity Futures 
Trading Commission, [Name of CPO] is not required to register, and 
is not registered, with the Commission as a CPO. Among other things, 
the No-Action Relief requires this CPO to file a Claim of No-Action 
Relief with the National Futures Association and the Commission. It 
also requires that at all times either: (a) The aggregate initial 
margin and premiums required to establish commodity interest 
positions does not exceed two percent of the liquidation value of 
the pool's portfolio; or (b) the aggregate net notional value of 
this pool's commodity interest positions does not exceed fifty 
percent of the liquidation value of the pool's portfolio.
    You should also know that this registration No-Action Relief is 
temporary. In the event the Commission ultimately adopts a 
registration exemption rule that differs from the No-Action Relief, 
[Name of CPO] must comply with that rule to be exempt from CPO 
registration. If [Name of CPO] determines not to comply with that 
rule, it must either register with the Commission or cease having 
this pool trade commodity interests. A reasonable opportunity to 
trade for liquidation only will be provided.

    b. For CTAs: To comply with the terms of a Claim of Registration 
No-Action Relief that it has filed, a CTA must provide the following 
disclosure to each pool it advises or intends to advise prior to 
engaging in activities that otherwise would require it to register as a 
CTA:

    Pursuant to No-Action Relief issued by the Commodity Futures 
Trading Commission, [Name of CTA] is not required to register, and 
is not registered, with the Commission as a CTA. Among other things, 
the No-Action Relief requires this CTA to file a claim of No-Action 
Relief with the National Futures Association and the Commission. It 
also requires that this CTA provide advice solely to pools whose 
CPOs have filed a corresponding claim of No-Action Relief.
    You should also know that this registration No-Action Relief is 
temporary. In the event the Commission ultimately adopts a 
registration exemption rule that differs from the No-Action Relief, 
[Name of CTA] must comply with that rule to be exempt from CTA 
registration. If [Name of CTA] determines not to comply with that 
rule, it must either register with the Commission or cease providing 
commodity interest trading advice to this pool. A reasonable 
opportunity to trade for liquidation only will be provided.
5. Effect of Filing a Claim of No-Action Relief
    Persons that have filed a Claim of No-Action Relief will be exempt 
from Commission registration requirements under Section 4m(1) of the 
Act. Such persons will remain subject, however, to prohibitions in the 
Act and the Commission's rules against fraud that apply to all CPOs and 
CTAs regardless of registration status. They also will remain subject 
to all other relevant provisions of the Act and the Commission's rules 
that apply to all commodity interest market participants, such as the 
prohibitions on manipulation and the trade reporting requirements.

C. Other Matters

1. Effect of Final Rulemaking on No-Action Relief
    The no-action relief the Commission is announcing today by this 
Federal Register release will remain in effect until such time as the 
Commission takes final action on the related rules it is proposing 
herein. Any final rules that the Commission adopts as a result of this 
proposed rulemaking will supersede this no-action relief. In the event 
final rules differ from the requirements of the no-action relief, the 
Commission will provide affected eligible persons, CPOs and CTAs with 
sufficient time within which to comply with such requirements, or, in 
the event an eligible person, CPO or CTA is unable or unwilling to so 
comply, with sufficient time to register with the Commission (or, if 
applicable, to withdraw a previously filed Claim of No-Action Relief) 
and to cease engaging in business as a CPO or CTA. Following

[[Page 12633]]

the effective date of final rules, no new positions may be entered into 
in accordance with the no-action relief, but the Commission will, if 
necessary, provide a reasonable opportunity to liquidate previously-
entered positions if a person does not wish to comply with the 
exemptions provided or register under the Act.
2. Continued Availability of No-Action Relief From Commission Staff
    The Commission is aware that there may be persons that do not meet 
the criteria of the no-action relief under Rule 4.5 for eligible 
persons or Section 4m(1) of the Act for CPOs and CTAs but that 
nonetheless, under their particular facts or circumstances, merit 
relief. The Commission also is aware that, in the past, its staff has 
provided no-action relief from the criteria of Rule 4.5 and from the 
registration requirement of Section 4m(1) of the Act on a case-by-case 
basis. Consistent with that practice, the Commission directs its staff 
to continue to issue such relief in appropriate cases.

V. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) \77\ requires that agencies, 
in proposing rules, consider the impact of those rules on small 
businesses. The Commission has previously established certain 
definitions of ``small entities'' to be used by the Commission in 
evaluating the impact of its rules on such entities in accordance with 
the RFA.\78\ With respect to CPOs, the Commission has previously 
determined that a CPO is a small entity if it meets the criteria for 
exemption from registration under current Rule 4.13(a)(2).\79\ 
Therefore, the requirements of the RFA do not apply to CPOs who do not 
meet those criteria. With respect to CTAs, the Commission has 
previously stated that it would evaluate within the context of a 
particular rule proposal whether all or some affected CTAs would be 
considered to be small entities and, if so, the economic impact on them 
of the proposal.\80\ The Commission believes that the instant proposed 
rules will not place any burdens, whether new or additional, on CPOs 
and CTAs who would be affected hereunder. This is because the instant 
proposals, if adopted, would provide registration relief for more CPOs 
and CTAs and, for CPOs and CTAs who are not eligible for that relief, 
they would reduce, streamline and simplify existing requirements.
---------------------------------------------------------------------------

    \77\ 5 U.S.C. 601 et seq.
    \78\ 47 FR 18618 (April 30, 1982).
    \79\ Id. at 18619-20.
    \80\ Id. at 18620.
---------------------------------------------------------------------------

    The Commission's definitions of small entities do not address the 
persons and qualifying entities set forth in Rule 4.5 because, by the 
very nature of the rule, the operations and activities of such persons 
and entities generally are regulated by federal and state authorities 
other than the Commission. Assuming, arguendo, that Rule 4.5 eligible 
persons or qualifying entities would be small entities for purposes of 
the RFA, the Commission believes that the proposed amendment to Rule 
4.5 would not have a significant economic impact on them because it 
would permit greater operational flexibility for persons currently 
claiming relief under the rule, and it would make relief under the rule 
available to more persons (each of whom would only have to file a 
notice to be relieved from the requirement to register as a CPO and 
from the disclosure, reporting and recordkeeping requirements 
applicable to registered CPOs).
    Accordingly, the Chairman, on behalf of the Commission, certifies 
pursuant to Section 605(b) of the RFA \81\ that the proposed rules will 
not have a significant economic impact on a substantial number of small 
entities. However, the Commission invites the public to comment on this 
finding.
---------------------------------------------------------------------------

    \81\ 5 U.S.C. 605(b).
---------------------------------------------------------------------------

B. Paperwork Reduction Act

    This proposed rulemaking affects information collection 
requirements. As required by the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507(d)), the Commission has submitted a copy of this section to 
the Office of Management and Budget for its review.

Collection of Information

    Rules Relating to the Operations and Activities of Commodity Pool 
Operators and Commodity Trading Advisors and to Monthly Reporting by 
Futures Commission Merchants, OMB Control Number 3038-0005.
    The expected effect of the proposed amended rules will be to reduce 
the burden previously approved by OMB for this collection of 
information by 31,025.97 hours because, while it will result in an 
increase in the number of filings under Rules 4.5, 4.13 and 4.14, it 
will result in a larger decrease in the information collection 
requirements under the disclosure, reporting and recordkeeping rules 
that otherwise would be applicable.
    Specifically:
    The burden associated with Commission Rule 4.5 is expected to be 
increased by 25 hours:
    Estimated number of respondents: 325.
    Annual responses by each respondent: 2.
    Estimated average hours per response: .5.
    Annual reporting burden: 325 hours.
    This annual reporting burden of 325 hours represents an increase of 
25 hours as a result of the proposed amendment to Rule 4.5.
    The burden associated with Commission Rule 4.13 is expected to be 
increased by 187.5 hours:
    Estimated number of respondents: 600.
    Annual responses by each respondent: 1.
    Estimated average hours per response: .5.
    Annual reporting burden: 300.
    This annual reporting burden of 300 hours represents an increase of 
187.5 hours as a result of the proposed amendments to Rule 4.13.
    The burden associated with Commission Rule 4.14 is expected to be 
increased by 5 hours:
    Estimated number of respondents: 60.
    Annual responses by each respondent: 1.
    Estimated average hours per response: .5.
    Annual reporting burden: 30.
    This annual reporting burden of 30 hours represents an increase of 
5 hours as a result of the proposed amendments to Rule 4.14.
    The burden associated with Commission Rule 4.21 is expected to be 
decreased by 1540 hours:
    Estimated number of respondents: 100.
    Annual responses by each respondent: 2.
    Estimated average hours per response: 2.8.
    Annual reporting burden: 560.
    This annual reporting burden of 560 hours represents a decrease of 
1,540 hours as a result of the proposed amendments to Rules 4.5, 4.13 
and 4.21.
    The burden associated with Commission Rule 4.22(a) is expected to 
be decreased by 7,796.25 hours:
    Estimated number of respondents: 100.
    Annual responses by each respondent: 9.
    Estimated average hours per response: 3.85.
    Annual reporting burden: 3,465.
    This annual reporting burden of 3,465 hours represents a decrease 
of 7,796.25 hours as a result of the proposed amendments to Rules 4.5, 
4.13 and 4.22.

[[Page 12634]]

    The burden associated with Commission Rule 4.22(c) is expected to 
be reduced by 4,050 hours:
    Estimated number of respondents: 100.
    Annual responses by each respondent: 2.
    Estimated average hours per response: 9.
    Annual reporting burden: 1,800.
    This annual reporting burden of 1,800 hours represents a decrease 
of 4,050 hours as a result of the proposed amendments to Rules 4.5, 
4.13 and 4.22.
    The burden associated with Commission Rule 4.23 is expected to be 
reduced by 11,700 hours:
    Estimated number of respondents: 100.
    Annual responses by each respondent: 1.
    Estimated average hours per response: 52.
    Annual reporting burden: 5,200
    This annual reporting burden of 5,200 hours represents a decrease 
of 11,700 hours as a result of the proposed amendments to Rules 4.5, 
4.13 and 4.22.
    The burden associated with Commission Rule 4.31 is expected to be 
reduced by 577.22 hours:
    Estimated number of respondents: 310.
    Annual responses by each respondent: 1.33.
    Estimated average hours per response: 1.4.
    Annual reporting burden: 577.22.
    This annual reporting burden of 577.22 hours represents a decrease 
of 577.22 hours as a result of the proposed amendments to Rule 4.14.
    The burden associated with Commission Rule 4.33 is expected to be 
reduced by 29,880 hours:
    Estimated number of respondents: 310.
    Annual responses by each respondent: 1.
    Estimated average hours per response: 18.
    Annual reporting burden: 5,580.
    This annual reporting burden of 5,580 hours represents a decrease 
of 5,580 hours as a result of the proposed amendments to Rule 4.14.
    As stated, these changes will result in an overall reduction of 
31,025.97 hours in burden for this collection.
    Organizations and individuals desiring to submit comments on the 
information collection requirements should direct them to the Office of 
Information and Regulatory Affairs, OMB, Room 10235 New Executive 
Office Building, Washington, DC 20503; Attention: Desk Officer for the 
Commodity Futures Trading Commission.
    The Commission considers comments by the public on this proposed 
collection of information in--
    [sbull] Evaluating whether the proposed collection of information 
is necessary for the proper performance of the functions of the 
Commission, including whether the information will have a practical 
use;
    [sbull] Evaluating the accuracy of the Commission's estimate of the 
burden of the proposed collection of information, including the 
validity of the methodology and assumptions used;
    [sbull] Enhancing the quality, usefulness, and clarity of the 
information to be collected; and
    [sbull] Minimizing the burden of collection of information on those 
who are to respond, including through the use of appropriate automated 
electronic, mechanical, or other technological collection techniques or 
other forms of information technology, e.g., permitting electronic 
submission of responses.
    OMB is required to make a decision concerning the collection of 
information contained in these proposed regulations between 30 and 60 
days after publication of this document in the Federal Register. 
Therefore, a comment to OMB is best assured of having its full effect 
if OMB receives it within 30 days of publication. This does not affect 
the deadline for the public to comment to the Commission on the 
proposed regulations.
    Copies of the information collection submission to OMB are 
available from the CFTC Clearance Officer, 1155 21st Street NW., 
Washington, DC 20581, (202) 418-5160.

C. Cost-Benefit Analysis

    Section 15(a) of the Act requires the Commission to consider the 
costs and benefits of its action before issuing a new regulation under 
the Act. By its terms, Section 15(a) does not require the Commission to 
quantify the costs and benefits of a new regulation or to determine 
whether the benefits of the proposed regulation outweigh its costs. 
Rather, Section 15(a) simply requires the Commission to ``consider the 
costs and benefits'' of its action.
    Section 15(a) further specifies that costs and benefits shall be 
evaluated in light of five broad areas of market and public concern: 
Protection of market participants and the public; efficiency, 
competitiveness, and financial integrity of futures markets; price 
discovery; sound risk management practices; and other public interest 
considerations. Accordingly, the Commission could in its discretion 
give greater weight to any one of the five enumerated areas and could 
in its discretion determine that, notwithstanding its costs, a 
particular rule was necessary or appropriate to protect the public 
interest or to effectuate any of the provisions or to accomplish any of 
the purposes of the Act.
    The proposed amendments are intended to facilitate increased 
flexibility and consistency, and to rationalize application of 
Commission regulations to entities subject to other regulatory 
frameworks. The Commission is considering the costs and benefits of 
these rules in light of the specific provisions of Section 15(a) of the 
Act:
1. Protection of Market Participants and the Public
    While certain of the proposed amendments are expected to lessen the 
burden imposed upon CPOs and CTAs, any exclusion or exemption of 
persons from regulatory requirements would be based on such factors as 
financial sophistication of pool participants and advisory clients or a 
low level of exposure to commodity interest markets. Accordingly, the 
proposed amendments should have no effect on the Commission's ability 
to protect market participants and the public.
2. Efficiency and Competition
    The proposed amendments are expected to benefit efficiency and 
competition by removing barriers to participation in the commodity 
interest markets, resulting in greater liquidity and market efficiency.
3. Financial Integrity of Futures Markets and Price Discovery
    The proposed amendments should have no effect, from the standpoint 
of imposing costs or creating benefits, on the financial integrity or 
price discovery function of the commodity futures and options markets.
4. Sound Risk Management Practices
    The proposed amendments should increase the available range of risk 
management alternatives for Rule 4.5 eligible persons, as well as for 
CTAs and CPOs.
5. Other Public Interest Considerations
    The proposed amendments will also take into account certain effects 
of legislative changes (e.g., in the case of exemption for registered 
investment advisers) and the passage of time (e.g., revising the 
contribution limit for the small commodity pool exemption and 
permitting electronic delivery of pool Account Statements).
    After considering these factors, the Commission has determined to 
propose the amendments discussed above. The

[[Page 12635]]

Commission invites public comment on its application of the cost-
benefit provision. Commenters also are invited to submit any data that 
they may have quantifying the costs and benefits of the proposal with 
their comment letters.

List of Subjects in 17 CFR Part 4

    Advertising, Commodity futures, Consumer protection, Reporting and 
recordkeeping requirements.

    For the reasons presented above, the Commission hereby proposes to 
amend Chapter I of Title 17 of the Code of Federal Regulations as 
follows:

PART 4--COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS

    1. The authority citation for part 4 continues to read as follows:

    Authority: 7 U.S.C. 1a, 2, 6b, 6c, 6(c), 6l, 6m, 6n, 6o, 12a and 
23.

    2. Section 4.5 is proposed to be amended by:
    a. deleting paragraph (c)(2)(i);
    b. redesignating paragraph (c)(2)(ii) as paragraph (c)(2)(i);
    c. deleting paragraph (c)(2)(iii); and
    d. redesignating paragraph (c)(2)(iv) as paragraph (c)(2)(ii).
    3. Section 4.7 is proposed to be amended by revising paragraph 
(d)(1)(vii) to read as follows:


Sec.  4.7  Exemption from certain part 4 requirements for commodity 
pool operators with respect to offerings to qualified eligible persons 
and for commodity trading advisors with respect to advising qualified 
eligible clients.

* * * * *
    (d) * * *
    (1) * * *
    (vii) Be manually signed by a duly authorized representative of the 
commodity pool operator or commodity trading advisor;
* * * * *
    4. Section 4.12 is proposed to be amended by revising paragraph 
(b)(3)(vi) to read as follows:


Sec.  4.12  Exemption from provisions of part 4.

* * * * *
    (b) * * *
    (3) * * *
    (vi) Be manually signed by a duly authorized representative of the 
pool operator; and
* * * * *
    5. Section 4.13 is proposed to be amended by:
    a. adding introductory text;
    b. deleting the ``or'' at the end of paragraph (a)(1)(iv);
    c. revising paragraph (a)(2);
    d. adding new paragraphs (a)(3), (a)(4) and (a)(5);
    e. revising paragraph (b);
    f. redesignating paragraphs (c) and (d) as paragraphs (d) and (e) 
and revising the redesignated paragraphs; and
    g. adding a new paragraph (c), to read as follows:


Sec.  4.13  Exemption from registration as a commodity pool operator.

    This section is organized as follows: Paragraph (a) specifies the 
criteria that must be met to qualify for exemption from registration 
under this section; paragraph (b) governs the notice that must be filed 
to claim exemption from registration; paragraph (c) sets forth the 
continuing obligations of a person who has claimed exemption under this 
section; paragraph (d) specifies information certain persons must 
provide if they subsequently register; and paragraph (e) specifies the 
effect of registration on a person who has claimed an exemption from 
registration under this section or who is eligible to claim an 
exemption from registration under this section.
    (a) * * *
    (2)(i) None of the pools operated by it has more than 15 
participants at any time; and
    (ii) The total gross capital contributions it receives for units of 
participation in all of the pools it operates or that it intends to 
operate do not in the aggregate exceed $400,000.
    (iii) For the purpose of determining eligibility for exemption 
under paragraph (a)(2) of this section, the person may exclude the 
following participants and their contributions:
    (A) The pool's operator, commodity trading advisor, and the 
principals thereof;
    (B) A child, sibling or parent of any of these persons;
    (C) The spouse of any person specified in paragraph (a)(2)(iii)(A) 
or (B) of this section; and
    (D) Any relative of a person specified in paragraph (a)(2)(iii)(A), 
(B) or (C) of this section, its spouse or a relative of its spouse, who 
has the same principal residence as such person;
    (3)(i) At any time, each pool for which the operator claims 
exemption from registration under this paragraph (a)(3) meets either of 
the following tests with respect to its commodity interest positions, 
whether entered into for bona fide hedging purposes or otherwise:
    (A) The aggregate initial margin and premiums required to establish 
such positions, determined at the time the most recent position was 
established, will not exceed two percent of the liquidation value of 
the pool's portfolio, after taking into account unrealized profits and 
unrealized losses on any such positions it has entered into; Provided, 
That in the case of an option that is in-the-money at the time of 
purchase, the in-the-money amount as defined in Sec.  190.01(x) of this 
chapter may be excluded in computing such two percent; or
    (B) The aggregate net notional value of such positions, determined 
at the time the most recent position was established, does not exceed 
fifty percent of the liquidation value of the pool's portfolio, after 
taking into account unrealized profits and unrealized losses on any 
such positions it has entered into. For the purpose of this paragraph, 
the term ``notional value'' shall be calculated for each such futures 
position by multiplying the number of contracts by the size of the 
contract, in contract units (taking into account any multiplier 
specified in the contract), by the current market price per unit, and 
for each such option position by multiplying the number of contracts by 
the size of the contract, in contract units (taking into account any 
multiplier specified in the contract), by the strike price per unit;
    (ii) It reasonably believes, at the time of investment (or, in the 
case of an existing pool, at the time of conversion to a pool meeting 
the criteria of paragraph (a)(3) of this section), that each person who 
participates in the pool is an ``accredited investor,'' as that term is 
defined in Sec.  230.501 of this title; Provided, That nothing in 
paragraph (a)(3) of this section will prohibit the person from claiming 
an exemption under this section if it additionally operates one or more 
pools for which it meets the criteria of paragraph (a)(4) of this 
section; and
    (iii) It does not market participations in the pool as or in a 
vehicle for trading in the commodity futures or commodity options 
markets; or
    (4) For each pool for which the operator claims exemption from 
registration under this paragraph (a)(4):
    (i) Interests in the pool are exempt from registration under the 
Securities Act of 1933, and such interests are offered and sold without 
marketing to the public in the United States;
    (ii) It reasonably believes, at the time of investment (or, in the 
case of an existing pool, at the time of conversion to a pool meeting 
the criteria of paragraph (a)(4) of this section), that:
    (A) Each natural person participant (including the person's self-
directed employee benefit plan, if any), is a ``qualified eligible 
person,'' as that term is defined in Sec.  4.7(a)(2); and

[[Page 12636]]

    (B) Each non-natural person participant is a ``qualified eligible 
person,'' as that term is defined in Sec.  4.7, or an ``accredited 
investor,'' as that term is defined in Sec.  230.501(a)(1) through (3), 
(a)(7) and (a)(8) of this title; Provided, That nothing in paragraph 
(a)(4) of this section will prohibit the person from claiming an 
exemption under this section if it additionally operates one or more 
pools that meet the criteria of paragraph (a)(3) of this section.
    (5)(i) Eligibility for exemption under this section is subject to 
the commodity pool operator furnishing in writing to each prospective 
participant in the pool:
    (A) A statement that the pool operator is exempt from registration 
with the Commission as a commodity pool operator and that therefore, 
unlike a registered commodity pool operator, it is not required to 
deliver a Disclosure Document and a certified annual report to 
participants in the pool; and
    (B) A description of the criteria pursuant to which it qualifies 
for such exemption from registration.
    (ii) The pool operator must make these disclosures by no later than 
the time it delivers a subscription agreement for the pool to a 
prospective participant in the pool.
    (b)(1) A commodity pool operator who desires to claim the relief 
from registration provided by this section must file a notice of 
exemption from commodity pool operator registration with the National 
Futures Association (Attn: Director of Compliance). The notice must:
    (i) Provide the name, main business address, main business 
telephone number, main facsimile number and main email address of the 
pool operator claiming the exemption and the name of the pool for which 
it is claiming exemption;
    (ii) Contain the section number pursuant to which the operator is 
filing the notice (i.e., Sec.  4.13(a)(1), (a)(2), (a)(3), (a)(4), or 
both (a)(3) and (a)(4)) and represent that the pool will be operated in 
accordance with the criteria of that paragraph or paragraphs; and
    (iii) Be signed by a duly authorized representative of the pool 
operator.
    (2) The commodity pool operator must file the notice by no later 
than the time it delivers a subscription agreement for the pool to a 
prospective participant in the pool; Provided, That where the operator 
is registered with the Commission as a commodity pool operator, it must 
notify its pool's participants in writing that it intends to withdraw 
from registration and claim the exemption, and it must provide each 
such participant with a right to redeem its interest in the pool prior 
to the operator filing a notice of exemption from registration.
    (3) The notice will be effective upon filing, provided the notice 
is materially complete.
    (4) A commodity pool operator who has filed a notice of exemption 
from registration under this section must, in the event that any of the 
information contained or representations made in the notice becomes 
inaccurate or incomplete, file a supplemental notice with the National 
Futures Association to that effect which, if applicable, includes such 
amendments as may be necessary to render the notice accurate and 
complete. This supplemental notice must be filed within 15 business 
days after the pool operator becomes aware of the occurrence of such 
event.
    (c)(1) Each commodity pool operator who has filed a notice of 
exemption from registration under this section must:
    (i) Make and keep all books and records prepared in connection with 
its activities as a pool operator for a period of five years from the 
date of preparation;
    (ii) Keep such books and records readily accessible during the 
first two years of the five-year period. All such books and records 
must be available for inspection upon the request of any representative 
of the Commission, the United States Department of Justice, or any 
other appropriate regulatory agency; and
    (iii) Submit to such special calls as the Commission may make to 
demonstrate eligibility for and compliance with the applicable criteria 
for exemption under this section.
    (2) In the event the pool operator distributes an annual report to 
participants in the pool for which it has filed the notice, the annual 
report must be presented and computed in accordance with generally 
accepted accounting principles consistently applied and, if certified 
by an independent public accountant, so certified in accordance with 
Sec.  1.16 of this chapter as applicable.
    (3) Each commodity pool operator who has filed a notice of 
exemption from registration pursuant to paragraph (a)(1) or (a)(2) of 
this section must:
    (i) Promptly furnish to each participant in the pool a copy of each 
monthly statement for the pool that the pool operator received from a 
futures commission merchant pursuant to Sec.  1.33 of this chapter; and
    (ii) Clearly show on such statement, or on an accompanying 
supplemental statement, the net profit or loss on all commodity 
interests closed since the date of the previous statement.
    (d) Each person who applies for registration as a commodity pool 
operator subsequent to claiming relief under paragraph (a)(1) or (a)(2) 
of this section must include with its application the financial 
statements and other information required by Sec.  4.22(c)(1) through 
(5) for each pool that it has operated as an operator exempt from 
registration. That information must be presented and computed in 
accordance with generally accepted accounting principles consistently 
applied. If the person is granted registration as a commodity pool 
operator, it must comply with the provisions of this part with respect 
to each such pool.
    (e)(1) Subject to the provisions of paragraph (e)(2) of this 
section, if a person who is eligible for exemption from registration as 
a commodity pool operator under this section nonetheless registers as a 
commodity pool operator, the person must comply with the provisions of 
this part with respect to each commodity pool identified on its 
registration application or supplement thereto.
    (2) If a person operates one or more commodity pools described in 
paragraph (a)(3) or (a)(4) of this section, and one or more commodity 
pools for which it must be, and is, registered as a commodity pool 
operator, the person is exempt from the requirements applicable to a 
registered commodity pool operator with respect to the pool or pools 
described in paragraph (a)(3) or (a)(4) of this section; Provided, That 
the person:
    (i) Furnishes in writing to each prospective participant in a pool 
described in paragraphs (a)(2), (a)(3) or (a)(4) of this section that 
it operates:
    (A) A statement that it will operate the pool as if the person was 
exempt from registration as a commodity pool operator;
    (B) A description of the criteria pursuant to which it will so 
operate the pool; and
    (ii) Complies with paragraph (c) of this section.
    6. Section 4.14 is proposed to be amended by:
    a. adding introductory text;
    b. revising paragraph (a)(8);
    c. removing the period and adding a semi-colon followed by the word 
``or'' at the end of paragraph (a)(9)(ii);
    d. adding new paragraph (a)(10); and
    e. revising paragraph (c), to read as follows:


Sec.  4.14  Exemption from registration as a commodity trading advisor.

    This section is organized as follows: Paragraph (a) specifies the 
criteria that

[[Page 12637]]

must be met to qualify for exemption from registration under this 
section, including the notice of exemption from registration and 
continuing obligations of persons who have claimed exemption under 
paragraph (a)(8) of this section; paragraph (b) concerns ``cash market 
transactions''; and paragraph (c) specifies the effect of registration 
on a person who has claimed an exemption from registration under this 
section or who is eligible to claim an exemption from registration 
under this section.
    (a) * * *
    (8) It is registered as an investment adviser under the Investment 
Advisers Act of 1940 or with the applicable securities regulatory 
agency of any State, or it is exempt from such registration, or it is 
excluded from the definition of the term ``investment adviser'' 
pursuant to the provisions of sections 202(a)(2) and 202(a)(11) of the 
Investment Advisers Act of 1940, Provided, That:
    (i) The person's commodity interest trading advice is directed 
solely to, and for the sole use of, one or more of the following:
    (A) ``Qualifying entities,'' as that term is defined in Sec.  
4.5(b), for which a notice of eligibility has been filed;
    (B) Collective investment vehicles that are excluded from the 
definition of the term commodity ``pool'' under Sec.  4.5(b); and
    (C) Commodity pools that are organized and operated outside of the 
United States, its territories or possessions, where:
    (1) The commodity pool operator of each such pool has not so 
organized and is not so operating the pool for the purpose of avoiding 
commodity pool operator registration;
    (2) With the exception of the pool's operator, advisor and their 
principals, solely ``Non-United States persons,'' as that term is 
defined in Sec.  4.7(a)(1)(iv), will contribute funds or other capital 
to, and will own beneficial interests in, the pool;
    (3) No person affiliated with the pool conducts any marketing 
activity for the purpose of, or that could reasonably have the effect 
of, soliciting participation from other than Non-United States persons; 
and
    (4) No person affiliated with the pool conducts any marketing 
activity from within the United States, its territories or possessions; 
and
    (D) A commodity pool operator who has claimed an exemption from 
registration under Sec.  4.13(a)(3) or 4.13(a)(4), or, if registered as 
a commodity pool operator, who may treat each pool it operates that 
meets the criteria of Sec.  4.13(a)(3) or 4.13(a)(4) as if it were not 
so registered;
    (ii) The person:
    (A) Provides commodity interest trading advice solely incidental to 
its business of providing securities or other investment advice to 
qualifying entities, collective investment vehicles and commodity pools 
as described in paragraph (a)(8)(i) of this section; and
    (B) Is not otherwise holding itself out as a commodity trading 
advisor.
    (iii)(A) A commodity trading advisor who desires to claim the 
relief from registration provided by this paragraph (a)(8) must file a 
notice of exemption from commodity trading advisor registration with 
the National Futures Association (ATTN: Director of Compliance). The 
notice must:
    (1) Provide the name, main business address, main business 
telephone number, main facsimile number and main email address of the 
trading advisor claiming the exemption;
    (2) Contain the section number pursuant to which the advisor is 
filing the notice (i.e., Sec.  4.14(a)(8)(i)or (a)(8)(ii), or both 
(a)(8)(i) and (a)(8)(ii)) and represent that it will provide commodity 
interest advice to its clients in accordance with the criteria of that 
paragraph or paragraphs; and
    (3) Be signed by a duly authorized representative of the trading 
advisor.
    (B) The commodity trading advisor must file the notice by no later 
than the time it delivers an advisory agreement for the trading program 
pursuant to which it will offer commodity interest advice to a client; 
Provided, That where the advisor is registered with the Commission as a 
commodity trading advisor, it must notify its clients in writing that 
it intends to withdraw from registration and claim the exemption and 
must provide each such client with a right to terminate its advisory 
agreement prior to the advisor filing a notice of exemption from 
registration.
    (C) The notice will be effective upon filing, provided the notice 
is materially complete.
    (D) A commodity trading advisor who has filed a notice of 
registration exemption under this section must, in the event that any 
of the information contained or representations made in the notice 
becomes inaccurate or incomplete, file a supplemental notice with the 
National Futures Association to that effect which, if applicable, 
includes such amendments as may be necessary to render the notice 
accurate and complete. This supplemental notice must be filed within 15 
business days after the trading advisor becomes aware of the occurrence 
of such event.
    (iv) Each commodity trading advisor who has filed a notice of 
registration exemption under this paragraph (a)(8) must:
    (A)(1) Make and keep all books and records prepared in connection 
with its activities as a trading advisor, including all books and 
records demonstrating eligibility for and compliance with the 
applicable criteria for exemption under this section, for a period of 
five years from the date of preparation; and
    (2) Keep such books and records readily accessible during the first 
two years of the five-year period. All such books and records must be 
available for inspection upon the request of any representative of the 
Commission, the United States Department of Justice, or any other 
appropriate regulatory agency; and
    (B) Submit to such special calls as the Commission may make to 
demonstrate eligibility for and compliance with the applicable criteria 
for exemption under this section;
* * * * *
    (10) During the course of the preceding 12 months, it has not 
furnished commodity trading advice to more than 15 persons and it does 
not hold itself out generally to the public as a commodity trading 
advisor.
    (i) For the purpose of paragraph (a)(10) of this section, the 
following are deemed a single person:
    (A) A natural person, and:
    (1) Any minor child of the natural person;
    (2) Any relative, spouse, or relative of the spouse of the natural 
person who has the same principal residence;
    (3) All accounts of which the natural person and/or the persons 
referred to in paragraph (a)(10)(i)(A) of this section are the only 
primary beneficiaries; and
    (4) All trusts of which the natural person and/or the persons 
referred to in paragraph (a)(10)(i)(A) of this section are the only 
primary beneficiaries;
    (B)(1) A corporation, general partnership, limited partnership, 
limited liability company, trust (other than a trust referred to in 
paragraph (a)(10)(i)(A)(4) of this section), or other legal 
organization (any of which are referred to elsewhere in this section as 
a ``legal organization'') that receives commodity interest trading 
advice based on its investment objectives rather than the individual 
investment objectives of its shareholders, partners, limited partners, 
members, or beneficiaries (any of which are referred to elsewhere in 
this section as an ``owner''); and
    (2) Two or more legal organizations referred to in paragraph 
(a)(10)(i)(B)(1) of this section that have identical owners.

[[Page 12638]]

    (ii) Special rules. For the purpose of paragraph (a)(10) of this 
section:
    (A) An owner must be counted in its own capacity as a person if the 
commodity trading advisor provides advisory services to the owner 
separate and apart from the advisory services provided to the legal 
organization; Provided, That the determination that an owner is a 
client will not affect the applicability of paragraph (a)(10) of this 
section with regard to any other owner;
    (B)(1) A general partner of a limited partnership, or other person 
acting as a commodity trading advisor to the partnership, may count the 
limited partnership as one person; and
    (2) A manager or managing member of a limited liability company, or 
any other person acting as a commodity trading advisor to the company, 
may count the limited liability company as one person.
    (C) A commodity trading advisor that has its principal office and 
place of business outside of the United States, its territories or 
possessions must count only clients that are residents of the United 
States, its territories and possessions; a commodity trading advisor 
that has its principal office and place of business in the United 
States or in any territory or possession thereof must count all 
clients.
    (iii) Holding Out. Any commodity trading advisor relying on 
paragraph (a)(10) of this section shall not be deemed to be holding 
itself out generally to the public as a commodity trading advisor, 
within the meaning of section 4m(1) of the Act, solely because it 
participates in a non-public offering of interests in a collective 
investment vehicle under the Securities Act of 1933.
* * * * *
    (c)(1) Subject to the provisions of paragraph (c)(2) of this 
section, if a person who is eligible for exemption from registration as 
a commodity trading advisor under this section nonetheless registers as 
a commodity trading advisor, the person must comply with the provisions 
of this part with respect to those clients for which it could have 
claimed an exemption from registration under this section.
    (2) If a person provides commodity interest trading advice to a 
client described in paragraph (a) of this section and to a client for 
which it must be, and is, registered as a commodity trading advisor, 
the person is exempt from the requirements applicable to a registered 
commodity trading advisor with respect to the clients so described; 
Provided, That the person furnishes in writing to each prospective 
client described in paragraph (a) of this section a statement that it 
will provide commodity interest trading advice to the client as if it 
was exempt from registration as a commodity trading advisor.
    7. Section 4.21 is proposed to be amended by revising paragraph (a) 
to read as follows:


Sec.  4.21  Required delivery of pool Disclosure Document.

    (a)(1) Subject to the provisions of paragraph (a)(2) of this 
section, each commodity pool operator registered or required to be 
registered under the Act must deliver or cause to be delivered to a 
prospective participant in a pool that it operates or intends to 
operate a Disclosure Document for the pool prepared in accordance with 
Sec. Sec.  4.24 and 4.25 by no later than the time it delivers to the 
prospective participant a subscription agreement for the pool; 
Provided, That any material distributed in advance of the delivery of 
the Disclosure Document is consistent with or amended by the 
information contained in the Disclosure Document and with the 
obligations of the commodity pool operator under the Act, the 
Commission's regulations issued thereunder, and the laws of any other 
applicable federal or state authority.
    (2) For the purpose of the Disclosure Document delivery 
requirement, including any offering memorandum delivered pursuant to 
Sec.  4.7(b)(1) or 4.12(b)(2)(i), the term ``prospective pool 
participant'' does not include a commodity pool operated by a pool 
operator that is the same as, or that controls, is controlled by, or is 
under common control with, the pool operator of the offered pool.
* * * * *
    8. Section 4.22 is proposed to be amended by:
    a. revising paragraph (a) introductory text;
    b. adding new paragraph (a)(4),
    c. redesignating paragraph (b) as paragraph (b)(1),
    d. adding a new paragraph (b)(2),
    e. revising paragraph (c) introductory text,
    f. adding a new paragraph (c)(6),
    g. revising paragraph (h)(1),
    h. revising paragraph (h)(3), and
    i. adding new paragraph (h)(4), to read as follows:


Sec.  4.22  Reporting to pool participants.

    (a) Except as provided in paragraph (a)(4) of this section, each 
commodity pool operator registered or required to be registered under 
the Act must periodically distribute to each participant in each pool 
that it operates, within 30 calendar days after the last date of the 
reporting period prescribed in paragraph (b) of this section, an 
Account Statement, which shall be presented in the form of a Statement 
of Income (Loss) and a Statement of Changes in Net Asset Value, for the 
prescribed period. These financial statements must be presented and 
computed in accordance with generally accepted accounting principles 
consistently applied. The Account Statement must be signed in 
accordance with paragraph (h) of this section.
* * * * *
    (4) For the purpose of the Account Statement delivery requirement, 
including any Account Statement distributed pursuant to Sec.  4.7(b)(2) 
or 4.12(b)(2)(ii), the term ``participant'' does not include a 
commodity pool operated by a pool operator that is the same as, or that 
controls, is controlled by, or is under common control with, the pool 
operator of a pool in which the commodity pool has invested.
    (b)(1) * * *
    (2)(i) The Account Statement may be distributed to a pool 
participant by means of electronic media if the participant so 
consents; Provided, That a commodity pool operator must, prior to the 
transmission of any Account Statement by means of electronic media, 
disclose: The right of the participant to receive the Account Statement 
in paper form or by means of electronic delivery; the electronic media 
through which the Account Statement will be delivered; the duration, 
whether indefinite or not, of the period during which consent will be 
effective; any charges for electronic delivery; and that consent to 
electronic delivery may be revoked by the participant at any time.
    (ii) The pool operator must obtain a signed consent acknowledging 
disclosure of the information set forth in paragraph (b)(2)(i) of this 
section prior to the transmission of any Account Statement by 
electronic media to any participant who does not qualify as an 
institutional customer under Sec.  1.3(g) of this chapter.
    (c) Except as provided in paragraph (c)(6) of this section, each 
commodity pool operator registered or required to be registered under 
the Act must distribute an Annual Report to each participant in each 
pool that it operates, and must file two copies of the Report with the 
Commission, within 90 calendar days after the end on the pool's fiscal 
year or the permanent cessation of trading, whichever is earlier, but 
in no event longer than 90 days after funds are returned to pool 
participants; Provided, however, That if during any calendar year the 
commodity pool operator did

[[Page 12639]]

not operate a commodity pool, the pool operator must so notify the 
Commission within 30 calendar days after the end of such calendar year. 
The Annual Report must be signed pursuant to paragraph (h) of this 
section and must contain the following:
* * * * *
    (6) For the purpose of the Annual Report distribution requirement, 
including any annual report distributed pursuant to Sec.  4.7(b)(3) or 
4.12(b)(2)(iii), the term ``participant'' does not include a commodity 
pool operated by a pool operator that is the same as, or that controls, 
is controlled by, or is under common control with, the pool operator of 
a pool in which the commodity pool has invested; Provided, That the 
Annual Report of such investing pool contain financial statements that 
include such information as the Commission may specify concerning the 
operations of the pool in which the commodity pool has invested.
* * * * *
    (h)(1) Each Account Statement and Annual Report, including an 
account statement or annual report provided pursuant to Sec.  4.7(b) or 
4.12(b), must contain an oath or affirmation that, to the best of the 
knowledge and belief of the individual making the oath or affirmation, 
the information contained in the document is accurate and complete; 
Provided, however, That it shall be unlawful for the individual to make 
such oath or affirmation if the individual knows or should know that 
any of the information in the document is not accurate and complete.
* * * * *
    (3) Subject to the provisions of paragraph (h)(4) of this section, 
the oath or affirmation must be manually signed by a representative 
duly authorized to bind the pool operator.
    (4)(i) An Account Statement or Annual Report may contain a 
facsimile signature, Provided, That:
    (A) The CPO maintains in accordance with Sec.  4.23 the Account 
Statement or Annual Report containing the manual signature from which 
the facsimile signature was made; and
    (B) The Annual Report the CPO files with a registered futures 
association is manually signed.
    (ii) For each pool for which the CPO distributes an Account 
Statement by means of electronic media, the CPO must make and keep in 
accordance with Sec.  4.23 a manually signed copy of the Statement.
    9. Section 4.31 is proposed to be amended by revising paragraph (a) 
to read as follows:


Sec.  4.31  Required delivery of Disclosure Document to prospective 
clients.

    (a) Each commodity trading advisor registered or required to be 
registered under the Act must deliver or cause to be delivered to a 
prospective client a Disclosure Document containing the information set 
forth in Sec. Sec.  4.34 and 4.35 for the trading program pursuant to 
which the trading advisor seeks to direct the client's commodity 
interest account or to direct the client's commodity interest trading 
by means of a systematic program that recommends specific transactions 
by no later than the time the trading advisor delivers to the 
prospective client an advisory agreement to direct or guide the 
client's account; Provided, That any material distributed in advance of 
the delivery of the Disclosure Document is consistent with or amended 
by the information contained in the Disclosure Document and with the 
obligations of the commodity trading advisor under the Act, the 
Commission's regulations issued thereunder, and the laws of any other 
applicable federal or state authority.
* * * * *

    Issued in Washington, DC, on March 10, 2003 by the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 03-6180 Filed 3-14-03; 8:45 am]
BILLING CODE 6351-01-P